1. Cost-Volume-Profit Analysis

2. CVP Scenario Cost-volume-profit (CVP) analysis is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit). Per Unit Percentage of Sales Per Unit Percentage of Sales Selling price (trip ) £250100% Variable cost (fuel) 200 80 CONTRIBUTION (S.P-V.C) £ 50 20% Monthly fixed expenses: Rent £2,500 Rent £2,500 Driver’s Salary 3,500 Driver’s Salary 3,500 Car Maintenance 1,000 Car Maintenance 1,000 Total fixed expenses per month £ 6,500 Per Unit Percentage of Sales Per Unit Percentage of Sales Selling price (trip ) £250100% Variable cost (fuel) 200 80 CONTRIBUTION (S.P-V.C) £ 50 20% Monthly fixed expenses: Rent £2,500 Rent £2,500 Driver’s Salary 3,500 Driver’s Salary 3,500 Car Maintenance 1,000 Car Maintenance 1,000 Total fixed expenses per month £ 6,500

3. Break-Even Point The break-even point is the level of sales at which revenue equals expenses and net income is zero. Sales - Variable expenses - Fixed expenses Zero net income (break-even point)

4. CVP analysis: non-graphical computations 1. Fixed costs per annum £60 000 Unit selling price £20 Unit variable cost £10 Relevant range 4 000 - 12 000 units 2. Profit volume (P/V) ratio = Contribution x 100 Sales revenue 3. Break-even point (in units) = Fixed costs Contribution per unit 4. Break-even point (in sales value i.e. £ or £ ) = Fixed costs P/V ratio OR = BEP in units x S.P p.u = (20-10)/20 x 100 = 50% = 60,000/10 = 6000 units = 60,000/50% = £ 120,000 = 6000 * 20 = £ 120,000

5. 4. If unit fixed costs and revenues are not given, the break-even point (expressed in sales values) can be calculated as follows: Total fixed costs x Total sales Total contribution 5. Units to be sold to obtain a desired profit (£30,000 profit): Fixed costs + desired profit Contribution per unit 6. Sales to obtain a desired profit (£30 000 profit): Fixed costs + desired profit P/V ratio =( 60,000+ 30,000) /£10 = 9000 units =( 60,000+ 30,000) 50%= £180,000

6. CVP analysis assumptions 1. All other variables remain constant e.g. sales mix, production efficiency, price levels, production methods. 2.Complexity-related fixed costs do not change. If the range of items produced increases but volume remains unchanged, then it is assumed fixed costs will not alter. 3.Profits are calculated on a variable costing basis. 4.Unit variable cost and selling price are constant per unit of output. 5.The analysis applies over the relevant range only. 6.Costs can be accurately divided into their fixed and variable elements. 7.Single product or constant sales mix.

7. Margin of Safety How much can sales drop before we incur a loss? Margin of safety = Expected Sales – Break even sales Percentage margin of safety = Expected sales - Break-even sales Expected sales Operating profit = p/v ratio x(Exp. Sales-Break- even sales)

8. Cost-Volume-Profit Graph