cvp analysis by Iqbal jabed
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This document discusses cost-volume-profit analysis. It defines the basic profit equation and how total revenue, total costs, variable costs, fixed costs, and units of output relate to profit. It then covers break-even analysis, using the information to calculate the break-even point in units and sales dollars. Finally, it discusses how to analyze different cost structures using measures like operating leverage and margin of safety.
![The Profit EquationThe Profit Equation
Now, we’ll expand ourNow, we’ll expand our
original equation for profits!original equation for profits!
(P × Q) - [(V × Q) + F]=π](https://image.slidesharecdn.com/iqbaljabedcvpanalysis-141217115427-conversion-gate01/85/cvp-analysis-by-Iqbal-jabed-7-320.jpg)
![The Profit EquationThe Profit Equation
Now, we’ll expand ourNow, we’ll expand our
original equation for profits!original equation for profits!
(P × X) - [(V × X) + F]=
(P – V)Q – F=
π
π](https://image.slidesharecdn.com/iqbaljabedcvpanalysis-141217115427-conversion-gate01/85/cvp-analysis-by-Iqbal-jabed-8-320.jpg)
cvp analysis by Iqbal jabed
- 1. Cost Volume Profit Analysis
- 2. CostVolume Profit AnalysisCostVolume Profit Analysis IntroductionIntroduction The Profit FunctionThe Profit Function Breakeven AnalysisBreakeven Analysis Differential Cost AnalysisDifferential Cost Analysis
- 4. The Profit EquationThe Profit Equation Operating Profit Total Revenue Total Costs= – Operating profit equals total revenueOperating profit equals total revenue less total costs.less total costs. π = TR – TC
- 5. The Profit EquationThe Profit Equation Total Revenue Average Selling Price Per Unit Units of Output = × TR = P × Q
- 6. The Profit EquationThe Profit Equation Total Costs Variable Costs Per Unit Units of Output = × TC = (V × Q) + F Fixed Costs +
- 7. The Profit EquationThe Profit Equation Now, we’ll expand ourNow, we’ll expand our original equation for profits!original equation for profits! (P × Q) - [(V × Q) + F]=π
- 8. The Profit EquationThe Profit Equation Now, we’ll expand ourNow, we’ll expand our original equation for profits!original equation for profits! (P × X) - [(V × X) + F]= (P – V)Q – F= π π
- 9. ExampleExample Here is the information from the Mr. X Bikes: Total Per Unit Percent Sales (500 bikes) 250,000$ 500$ 100% Less: variable expenses 150,000 300 60% Contribution margin 100,000$ 200$ 40% Less: fixed expenses 80,000 Net income 20,000$
- 10. Finding TargetVolumesFinding TargetVolumes The formula to find a volume expressed in units for a target profit is . . . Target Volume (units) = Fixed costs + Target profit Contribution margin per unit How many bikes must Mr X sell to earn an annual profit of $100,000?
- 11. TargetVolume in Sales DollarsTargetVolume in Sales Dollars The equation for finding the target volume in sales dollars is . . . Fixed costs + Target profit Contribution margin ratioContribution margin ratio Target Volume (sales $) =
- 12. Finding the Break-Even PointFinding the Break-Even Point The Break-Even PointBreak-Even Point is the volume level where profits equal zero. To find the break-even point in unitsunits, we use the target volume in unitstarget volume in units equation and set the profit to zero. To find the break-even point in sales dollarssales dollars, we use the target volume in sales dollarstarget volume in sales dollars equation and set the profit to zero.
- 13. Break-Even in Units and dollarsBreak-Even in Units and dollars Let’s use the Mr X Bikes information again. Total Per Unit Percent Sales (500 bikes) 250,000$ 500$ 100% Less: variable expenses 150,000 300 60% Contribution margin 100,000$ 200$ 40% Less: fixed expenses 80,000 Net income 20,000$ Contribution margin ratio Contribution margin per unit
- 14. Break-Even in UnitsBreak-Even in Units Break-Even Volume (units) = Fixed costs Contribution margin per unit = $80,000 200 = 400 units
- 15. Break-Even in Sales DollarsBreak-Even in Sales Dollars = $200000 $80,000 .40 Fixed costs Contribution margin ratio Break-Even Volume (sales $) = =
- 16. Graphic PresentationGraphic Presentation Consider the following information for X Bikes: Income 300 units Income 400 units Income 500 units Sales 150,000$ 200,000$ 250,000$ Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000$ 80,000$ 100,000$ Less: fixed expenses 80,000 80,000 80,000 Net income (loss) (20,000)$ -$ 20,000$
- 17. - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 - 100 200 300 400 500 600 700 800 Graphic PresentationGraphic Presentation Volume per period (X) Dollars
- 18. - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 - 100 200 300 400 500 600 700 800 Graphic PresentationGraphic Presentation Break-even point Dollars Volume per period (X)
- 19. Using CVP to Analyze DifferentUsing CVP to Analyze Different Cost StructuresCost Structures Operating leverageOperating leverage Margin of safetyMargin of safety
- 20. Operating leverageOperating leverage Is a measure of how sensitive net operating income is to percentage change in sales. Degree of Operating leverageOperating leverage == Contribution margin Net operating income $100000 $20000 == = 5= 5
- 21. Margin of SafetyMargin of Safety Excess of projected (or actual) sales over the break- even volume. The amount by which sales can fall before the company is in the loss area of the break-even graph. Sales Volume - Break even sales volumeSales Volume - Break even sales volumeMargin of Safety =Margin of Safety = == $250000 -250000 -Fixed costsFixed costs CM ratioCM ratio = $250000 -= $250000 -$80000$80000 .4.4 = $50000= $50000
- 22. Thanks