1. Business Accounting and Finance
By-Hari Dallakoti

2. Cost, Volume and Profit Analysis

3. CVP Analysis
Cost-volume-profit (CVP) analysis is the study of the effects of changes of costs and volume on a company’s profits.
Cost-volume-profit analysis is important in profit planning.
It is also a critical factor in management decisions.
The examination of the relationship between costs, volume of production and sales and profit of activity in order to advise to the management about the consequences of various decisions.
For example;
How many students needed to enrol to break even on delivering a particular course
How many tickets does the ANFA needed to sell for a particular match to achieve a desired level of profit
What level of sales of a new product are required by a manufacturing company to make it a viable product.

4. Contd.
Cost-volume-profit (CVP) analysis helps to managers to understand the interrelationships among Cost, Volume and Profit by focusing their attention on the interactions among the prices of products, volume of activity, per unit variable costs, total fixed costs, and mix of products sold.
It is a vital tool used in many business decisions such as deciding what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire.

5. Factors that Impact on CPV
The level of activity or the volume of sales and/or production
The selling price of products
The variable costs per units
The total fixed costs
The mix of products if more than one product is sold

6. Key Assumptions of CVP Analysis
Selling price is constant.
Costs are constant i.e. linear.
All costs can be classified into fixed and variable.
In multiproduct companies, the sales mix is constant.
In manufacturing companies, inventories do not change (units produced = units sold).

7. Use of CVP Analysis to Compute Breakeven point
The unique sales level at which a company earns neither a profit nor incurs a loss, is called Breakeven point.
What is the break-even point?
Revenues
Costs =
Break-even point

8. Breakeven Analysis Can be computed by three ways: The equation method
The contribution margin method
Graphic method

9. The Equation Method
The equation method centers on the contribution approach to the income statement.
Particulars
Amount (Rs.)
Sales Revenues
xxxx
Less: Variable Costs
Contribution Margin
Less: Fixed Costs
Net Operating Income Or
Sales = Variable Costs + Fixed Costs+ Profit
Sales = Variable Costs + Fixed Costs + Profit
At Break-even point; Profit is Zero
Therefore, Break-even equation is;
Sales = Variable Costs + Fixed Costs

10. Example While using PV ratio S & S trading house information Per cycle
Percent
SPPU
Rs.500
100%
VCPU
Rs.300
60% CM
Rs.200
40%
Fixed costs = Rs.80,000
Solution:
Use our BE Equation; and Let X is BE Point in Cycles
While using CMPU
While using PV ratio
Sales = VC FC
Rs. 500x = Rs. 300x + Rs. 80,000
Rs. 500x- Rs. 300x = Rs. 80,000
Rs. 200x = Rs. 80,000
X = 400 Cycles
1x = 0.6x + Rs. 80,000
1x- 0.6x = Rs. 80,000
0.4x = Rs. 80,000
X = Rs. 200,000

11. The Unit Contribution Method
Is a variation of the equation method.
The method may be just a bit more intuitive than the equation method.
The approach centers on the idea that each unit sold provides a certain amount of CM that goes toward covering fixed costs.
Fixed Costs =
BEP in units
Unit Contribution Margin*
Fixed Costs =
BEP in Rupees
Contribution Margin ratio**
* Unit Contribution Margin or Contribution Margin Per Unit = Selling Price Per Unit – Variable Cost Per Unit
** Contribution Margin Ratio or P/V Ratio =
SPPU-VCPU
SPPU

12. Contribution Margin Income Statement
ACC 202
8/25/2018
Contribution Margin Income Statement
Sales (50,000 units) Rs.1,000,000
Variable costs ,000
Contribution margin Rs.400,000
Fixed costs ,000
Income from operations Rs.100,000
The contribution margin is available to cover the fixed costs and income from operations.
FIXED COSTS
Contribution margin
Income from Operations
Sales – Variable Cost = Contribution Margin
C-V-P Analysis

13. Contribution Margin Ratio
Sales (50,000 units) Rs.1,000,000
Variable costs (600,000)
Contribution margin Rs.400,000
Fixed costs (300,000)
Income from operations Rs.100,000
100%
60%
40%
30%
10%
Contribution margin ratio =
Sales – Variable costs
Sales
Rs.1,000,000 – Rs.600,000
Rs.1,000,000
Contribution margin ratio =
Contribution margin ratio =
40%

14. Expression of Contribution margin
100%
60%
40%
30%
10%
Sales (50,000 units) Rs.1,000,000
Variable costs ,000
Contribution margin Rs.400,000
Fixed costs ,000
Income from operations Rs.100,000
Rs.20 12
Rs. 8
The contribution margin can be expressed in three ways:
1. Total contribution margin in Rupees.
3. Contribution margin ratio P/V Ratio (percentage).
3. Unit contribution margin (Rupees per unit).

15. Calculating the Break-even Point
In Units
Sales (Rs.25 x ? units) Rs ?
Variable costs (Rs.15 x ? units) ?
Contribution margin Rs ,000
Fixed costs ,000
Income from operations Rs
Sales (Rs.25 x 9,000) Rs.225,000
Variable costs (Rs.15 x 9,000) 135,000
Contribution margin Rs. 90,000
Fixed costs ,000
Income from operations Rs
Rs.25 15
Rs.10
Fixed costs
Rs.90,000
9,000 units
Break-even sales (units) =
Rs.10
Unit contribution margin
PROOF!
At the break-even point, fixed costs and the contribution margin are equal.

16. Cost-Volume-Profit Chart
Rs.500
Rs.450
Rs.400
Rs.350
Rs.300
Rs.250
Rs.200
Rs.150
Rs.100
Rs. 50
Total Sales
Sales and Costs (Rs.000)
Variable Costs
60%
Units of Sales (000)
Unit selling price Rs.50
Unit variable cost
Unit contribution margin Rs.20
Total fixed costs Rs.100,000

17. 40% 60% Contd. Total Sales Variable Costs Contribution Margin
Rs.500
Rs.450
Rs.400
Rs.350
Rs.300
Rs.250
Rs.200
Rs.150
Rs.100
Rs. 50
Total Sales
Contribution Margin
40%
Sales and Costs (Rs.000)
Variable Costs
60%
Units of Sales (000)
Unit selling price Rs.50
Unit variable cost
Unit contribution margin Rs.20
Total fixed costs Rs.100,000
100%
60%
40%

18. 40% Contd. Total Costs Sales and Costs (Rs.000) 100% 60% 40% Rs.500
Units of Sales (000)
Unit selling price Rs.50
Unit variable cost
Unit contribution margin Rs.20
Total fixed costs Rs.100,000
100%
60%
40%

19. 40% Contd. Rs.100,00 Rs.20/unit = 5,000 units Break-Even Point
Sales and Costs (Rs.000)
Units of Sales (000)
Unit selling price Rs.50
Unit variable cost
Unit contribution margin Rs.20
Total fixed costs Rs.100,000
100%
60%
40%
Rs.100,00
Rs.20/unit
= 5,000 units

20. Contd. Sales and Costs (Rs.000) Operating Profit Area
Operating Loss Area
Sales and Costs (Rs.000)
Units of Sales (000)
Unit selling price Rs.50
Unit variable cost 30
Unit contribution margin Rs. 20
Total fixed costs Rs.100,000
100%
60%
40%

21. Sales Mix Considerations
Product
Units
Weight (W)
SPPU
VCPU
CMPU
W × CMPU A B C XX …. .. …
TOTAL
Weighted Average Contribution Margin (WACMPU) = ….
For example;
Product
Units
Weight (W)
SPPU
VCPU
CMPU
W × CMPU A B C
100
200
500
100/800=0.125
200/800=0.25
500/800=0.625 10 8 4 6 5 3 1
4×0.125=0.5
3×0.25=0.75
1×0.625=0.625
TOTAL
800
Weighted Average Contribution Margin (WACMPU) =1.875

22. Contd. Product Units Weight (W) SPPU VCPU CM Ratio W × CM Ratio A B CXX …. .. …
TOTAL
Weighted Average Contribution Margin Ratio (WACM Ratio) = ….
For example;
Product
Units
Weight (W)
SPPU
VCPU
CM Ratio
W × CM Ratio A B C
100
200
500
100/800=0.125
200/800=0.25
500/800=0.625 10 8 4 6 5 3
0.400
0.375
0.250
0.4×0.125=0.2065
0.375×0.25=0.094
0.25×0.625=0.175
TOTAL
800
Weighted Average Contribution Margin (WACMPU) =0.4755

23. Or,
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑢𝑛𝑖𝑡𝑠 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 Ratio = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

24. Example Products A B Sales Rs.90 Rs.140 Variable costs (70) (95)
XYZ Company sold 8,000 units of Product A and 2,000 units of Product B during the past year. XYZ Company’s fixed costs are Rs.200,000. Other relevant data are as follows:
Sales Rs Rs.140
Variable costs (70) (95)
Contribution margin Rs Rs.45
Sales mix 80% %
Products
A B

25. Sales Mix Consideration
Products
A B
Selling price per unit Rs Rs.140
Variable costs per unit
Contribution margin Rs Rs.45
Sales mix % %
Weighted average contribution margin Rs Rs.9
Rs.25
Fixed costs, Rs.200,000

26. Sales Mix Consideration
Product A B
Contribution margin Rs Rs.9
Rs.25
Break-even Sales Units = 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Rs.200,000
Rs.25 =
= 8,000 Units

27. Contd. Rs.25 Product A B Contribution margin Rs.16 Rs.9
A: 8,000 units x Sales Mix (80%) = 6,400
B: 8,000 units x Sales Mix (20%) = 1,600

28. Explanation Product A Product B Total Break-even point PROOF Sales:
6,400 units x Rs Rs.576, ,000
1,600 units x Rs Rs.224, ,000
Total sales Rs.576, Rs.224,000 Rs.800,000
Variable costs:
6,400 x Rs Rs.448, Rs.448,000
1,600 x Rs Rs.152,000 Rs.152,000
Total variable costs Rs.448, Rs.152,000 Rs.600,000
Contribution margin Rs.128, Rs.72,000 Rs.200,000
Fixed costs ,000
Income from operations Rs.0
Break-even point
PROOF

29. Margin of Safety (MOS) MOS
Excess of expected sales over breakeven sales.
It is the difference between actual or expected sales and sales at the break-even point.
Sales revenue
Rs.
Current sales revenue
Total costs
MOS
BEP
Units

30. Margin of Safety Ratio
Margin Safety Ratio= Actual Sales −Break Even Sales Actual Sales or Total Sales x100
Margin Safety = Rs.2,50,000 −Rs.2,00,000 Rs.2,50,000 x 100
Margin Safety = 20%

31. Formulae of Cost Volume Profit Analysis
1. Contribution Margin per Unit (CMPU) = Selling Price per unit – Variable cost per unit = Selling Price per unit x PV ratio = Difference in Profit/difference in sales units = Profit/margin of safety units 2. Profit Volume (Contribution margin) Ratio = 1 –CV ratio or = 1- VCPU/SPPU = Difference in Profit/difference in sales revenues = 1- Difference in costs/ difference in sales = Profit/margin of safety rupees 3. Break Even Point (in units) = Fixed cost/CMPU = … units = Fixed cost/PV ratio = ….in Rupees 4. Margin of Safety = Actual Sales – Break Even Sales = Margin of Safety/Actual sales = Profit/CMPU or PV ratio

32. Contd. 5. Required sales to earn desired profit:
Target sales volume to earn profit before tax in rupees
= [FC+ before tax target profit]/Contribution margin ratio
Target sales volume to earn profit before tax in units
= [FC+ before tax target profit]/Contribution margin per unit
Target sales volume to earn profit after tax (in rupees)
= [FC+{(desired profit after tax) / (1-t)}]/Contribution margin ratio
Target sales volume to earn profit after tax (in units)
= [FC+{(desired profit after tax) / (1-t)}]/Contribution margin per unit
6. Profit on Sales
= Sales – Variable Cost – Fixed Cost
= (Sales Rs.  P/V Ratio) – Fixed Cost
= (Sales Units  CMPU) – Fixed Cost
= Margin of Safety  CMPU
7. Sales to earn equal profit by two alternative
=Differences in fixed costs/difference in PV ratio or CMPU

33. End of the Unit
Thank you