Cost-Volume-Profit Analysis

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 UNITED INTERNATIONAL UNIVERSITY

AIS 4103: Management Accounting-I

Section –B
Group Assignment on CVP Analysis

Prepared For
James Bakul Sarker
Associate Professor
United International University

Prepared By
Members' Name ID Email Contact Number

Sayma 114171017 slina114171@bba- 01687366931

SultanaLina(Leader) ais.uiu.ac.bd
Sumaiya Hashem 114171022 shashem114171@bba- 01682069941
ais.uiu.ac.bd
Sazia Sattar 114181011 ssattar181011@bba- 01935213894
ais.uiu.ac.bd

Date of Submission: September 11, 2020

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Members participation

Member name ID Participation

Sayma Sultana Lina (Leader) 114171017 100%

Sumaiya Hashem 114171022 100%

Sazia Sattar 114181011 100%

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Letter of Transmittal

Dr. James Bakul Sarker

Associate Professor

Department of BBA

United International University

Dear Sir,

Here is the report you assigned us to prepare on “CVP Analysis” for this course. In this report we
tried to develop case about an offline business from our personal experience and other source of
resources. We have covered all the necessary elements that should be included in this report.

Besides, we are still students and in a process of developing our skill. So, we hope that you will
be kind enough to consider the limitation of this report.

Thank you for giving us such an opportunity for working on the topic. We will be honored to
provide you any additional information, if necessary.

Sincerely yours,

Sayma Sultana Lina

On behalf of my group members.

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Acknowledgment

It is a great contentment to express our deep sense of gratitude to our honorable course teacher
Dr. James Bakul Sarker for giving us an opportunity to prepare a report on “CVP Analysis” as a
part of the course –“Management Accounting-I (AIS 4103)”

Our honorable course teacher helped us on our report every way possible. He taught us the CVP
analysis and make us understand how we can implement the standards in a real case. And is the
reason we could complete our report successfully.

We are also grateful to all the people who helped us to collect the information regarding the
report.

Therefore, we want to pay our gratitude to our course teacher again for giving us the greatest
opportunity to work on such a topic that will be very helpful in our future.

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Scope & Limitation

Scope:
This report contents almost all the necessary elements that should be included. We have tried to
calculate every necessary element using the data and resources we have gotten from “Fairy Tale
Enterprise. Hope that it will help people to know overall performance of it and the implication of
CVP analysis in business.

Limitation:
Besides scopes, this report has some limitation as well. Here we enlist the limitation of the
report:
The report contains only the basic data and information of “Fairy Tale Enterprise”
We only discussed about the implementation of CVP analysis which are applicable in this
particular business
There may be some typing mistakes, some syntax error and other defects.

Despite of these limitations, we tried to make this report as informative and analytical as possible
and we hope that report will be able to give one a brief knowledge about implication of CVP
analysis in this particular business.

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Executive Summary

Cost-volume-profit (CVP) analysis is a method that looks at the impact that varying levels of
costs and volume have on operating profit. The cost-volume-profit analysis, also commonly
known as break-even analysis, looks to determine the break-even point for different sales
volumes and cost structures, which can be useful for managers making short-term economic
decisions. It is a way for companies to determine how changes in costs (both variable and fixed)
and sales volume affect a company’s profit. Here, in our report, we tried to figure out all the
costs that incurred in” Fairy Tale Enterprise” as well as the sales volume, relevant range, target
profit, variable and fixed cost, break-even quantity and sales, degree of operating leverage and
many more. With this information, “Fairy Tale Enterprise” can better understand overall
performance by looking at how many units must be sold to break even or to reach a certain profit
threshold or the margin of safety.

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Table of content

Introduction........................................................................................................................................................... 9
Business overview ............................................................................................................................................... 10
CVP Analysis of “Fairy Tale Enterprise” ................................................................................................................ 11
All the costs that we incurred or need to incur for doing such business of “Fairy Tale Enterprise”................... 11
The sales volume in the case for particular month which is relevant for “Fairy Tale Enterprise”...................... 11
The relevant range for “Fairy Tale Enterprise” ................................................................................................. 11
The target profit “Fairy Tale Enterprise” desire for .......................................................................................... 11
Classification of “Fairy Tale Enterprise” cost into direct and indirect. .............................................................. 12
Classification of “Fairy Tale Enterprise” cost into variable and fixed costs ....................................................... 12
Classification of “Fairy Tale Enterprise” the fixed costs into traceable and common. Classification of the
traceable costs into controllable and non-controllable if possible and relevant............................................... 12
“Fairy Tale Enterprise” mixed cost used to find out the variable and fixed component using scatter-graph and
high-low method. ............................................................................................................................................ 13
The sunk cost, opportunity cost and relevant cost of “Fairy Tale Enterprise”................................................... 14
“Fairy Tale Enterprise” break-even quantity and break-even sales using equation method (Applied the concept
of sales mix here). ............................................................................................................................................ 15
“Fairy Tale Enterprise” target quantity and target sales (Applied the concept of sales mix here). ................... 15
“Fairy Tale Enterprise” contribution income statement for a particular month (product-wise and total). ....... 16
“Fairy Tale Enterprise” segmented income statement for a particular month (Product-wise and total). ......... 17
“Fairy Tale Enterprise” margin of safety in unit, in Tk. and in percentage ........................................................ 19
“Fairy Tale Enterprise” the degree of operating leverage (DOL). ...................................................................... 19
If “Fairy Tale Enterprise” decide to raise the price of any product, how much profit they expect to increase
from this product (Applied DOL to find out the answer). ................................................................................. 20
Recommendation and conclusion ........................................................................................................................ 21

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Introduction
Cost-volume-profit (CVP) analysis is a method of cost and management accounting that takes
into consideration those impact which varying levels of costs and volume have on operating
profit. The cost-volume-profit analysis makes several assumptions, including that the sales price,
fixed costs, and variable cost per unit are constant. Running this analysis involves using several
equations for price, cost and other variables, then plotting them out on an economic graph and
make assumptions.

CVP analysis estimates how much changes in a company's costs, both fixed and variable, sales
volume, and price, affect a company's profit. This is a very powerful tool in managerial and cost
accounting. It is one of the most widely used tools in managerial accounting to help managers
make better decisions.

As a manager, a component of our job may include monitoring costs, pricing or both. The cost-
volume-profit (CVP) analysis helps you to better understand the relationships between costs,
volumes (quantities) and profits by focusing on how pricing products, activity volume, fixed and
variable costs interact. Analyzing the CVP can give you the information needed to price, market
and make products to maximize the profit of the company. It also helps to predict cost or making
analysis of target profit. As a manager it is vitally important to assume cost behaviors while
making decisions so CVP provides a clear image for the cost related details of the business
which makes decision making easy.

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Business overview
“Fairy Tale Enterprise” started its journey on January 1, 2019. It is located 1/3 Rankin Street,
Wari, Dhaka, 1203. “Fairy Tale Enterprise” is a partnership business with 3 partners. All the
partners have provided equal amount of capital in the business. The net profit of the business is
divided equally between the partners and the net losses are also borne equally by the owners. All
liabilities of the business are borne, mitigated, and managed by all the partners.

The partners have equal rights in the management of the business, and each partner has devoted
an adequate amount of time to the conduct of the business. The adequacy of the time devoted by
the partners has been mutually agreed by all the partners.

“Fairy Tale Enterprise” has the motive of providing best quality of product to its customers.
They mainly use two types of product in their business, cotton and jorjet three piece. They bring
best quality of Cotton and jorjet clothes from the market, and then they do different types of
printing works on the clothes. After that, the clothes are packaged and are ready for sale. The
printing works are done so perfectly that it attracts all the customers mainly the female
customers. As it is located in a residential area, both products will be easily available to the
customers.

“Fairy Tale Enterprise” has the key commitment that the business has to made high-quality of
products. For “Fairy Tale Enterprise”, the main objective is not only to manage the business but
also to earn its customers satisfaction.

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CVP Analysis of “Fairy Tale Enterprise”

All the costs that we incurred or need to incur for doing such business of “Fairy Tale
Enterprise”

Costs incurred Taka (per unit) Taka (per unit)

Purchase of materials 300 350
Printing Costs 230 250
Packaging cost 120 140

Depreciation Expense 29000 taka

Rent 200000 taka
Shipping Expense 1000 taka

The sales volume in the case for particular month which is relevant for “Fairy Tale
Enterprise”

Sales volume for the month of August, 2020

a) Cotton Suit (product A) = 400 units
b) Jorjet Suit (product B) = 300 units
In total, 700 units.

The relevant range for “Fairy Tale Enterprise”

According to the shop that we have rented and the cost of the machine we have purchased for our
business, the relevant range to produce and sell goods is 1 to 800 units.

The target profit “Fairy Tale Enterprise” desire for

The business desires to achieve higher profit in the upcoming months. Though at the current
period the business is making profit but the target profits this business desires for is taka 100000
per month. The reason is that the business wants to add a new product line which is Pakistani
loan three piece, so that the business can grow more. So, the desired profit is taka 100000

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Classification of “Fairy Tale Enterprise” cost into direct and indirect.

Direct cost Cotton Suit (per unit) Jorjet Suit (per unit)
Materials purchased 300 350
Printing Cost 230 250
Packaging Cost 120 140

Indirect Cost Taka

Depreciation Expense 29000
Rent 200000
Shipping Expense 1000

Classification of “Fairy Tale Enterprise” cost into variable and fixed costs

Variable costs Cotton (per unit) Jorjet (per unit)

Materials Purchased 300 350
Printing Cost 230 250
Packaging Cost 120 140
Shipping Expense 1.25 1.25

Fixed Cost Taka

Depreciation 29000
Rent 200000
Shipping Expense 125

Classification of “Fairy Tale Enterprise” the fixed costs into traceable and common.
Classification of the traceable costs into controllable and non-controllable if possible
and relevant.
In “Fairy Tale Enterprise” rent 200,000tk and depreciation expense 29,000tk are common cost.
There is no traceable cost in the business. As there is no traceable cost, classifying traceable cost
into controllable and non-controllable is not possible and totally irrelevant.

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“Fairy Tale Enterprise” mixed cost used to find out the variable and fixed component
using scatter-graph and high-low method.

In this business there is a mixed cost and that is shipping expense-

Shipping Expenses
Units TK
300 500
400 600
500 750
600 850
700 1000

Total shipping expense (dependent variable) Y is plotted on the vertical axis and level of activity
i.e., units, X, (Independent variable) is plotted on the horizontal axis.

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High-low Method
b= (1000-500)/ (700-300)
=500/400
=1.25 per unit shipped
Here,
Y = a + bx
=>1000=a+1.25*700
=>1000-875=a
=>a=125
Hence, total variable cost is =1.25*700 =875tk
And, total fixed cost is =1000-875
=125tk

The sunk cost, opportunity cost and relevant cost of “Fairy Tale Enterprise”

Sunk cost is everything we spend money for the business that is not recoverable. Rent can be
considered as sunk cost for the business which is 200,000tk. As once rent is paid, the amount is
no longer recoverable.
In “Fairy Tale Enterprise” they print the product A (cotton) and product B (jorjet) and sale it.
The printing cost of product A is 230tk per unit and printing cost of product B is 250tk per unit.
Instead of doing that they could have done embroidery on both our product A and product B
which would have cost 270tk and 300tk per unit respectively. Hence, for product A opportunity
cost is 270tk per unit and for product B opportunity cost is 300tk per unit for printing the
products.
In the business they print the product A (cotton) and product B (jorjet) and sale it. The market
price of printing product A is cost 230tk per unit and printing product B is cost 250tk per unit.
Instead of doing that they could have done embroidery on both the product A and product B
which would have cost 270tk and 300tk per unit respectively. Hence, for product A relevant cost
is 40tk per unit and for product B opportunity cost is 50tk per unit.

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“Fairy Tale Enterprise” break-even quantity and break-even sales using equation
method (Applied the concept of sales mix here).

Sales mix = 400: 300 = 4:3

Let’s assume, BEQ of cotton= 4q
BEQ of jorjet = 3q
at break-even, we know, pq – vq – F =0
{(1000*4q) +(1200*3q)} - {(300*4q) + (350*3q)} – 229125 = 0
5350q = 229125
q = 42
BEQ of cotton = 4q = (42 * 4) = 168 units
BEQ of jorjet = 3q = (42 *3) = 126 units
BES of cotton in taka = pq
=168*1000
=168000tk
BES of jorjet in taka= pq
= 126*1200
=151200tk

“Fairy Tale Enterprise” target quantity and target sales (Applied the concept of sales
mix here).

Sales mix = 400: 300 = 4:3

Let’s assume, quantity of cotton= 4q
quantity of jorjet = 3q
to achieve target profit which is tk 100000
pq – vq – F = target profit
{(1000*4q) +(1200*3q)} - {(300*4q) + (350*3q)} – 229125 = 100000

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 => 5350q = 229125+100000
=> 5350q = 329125
=> q = 61
The target quantity of cotton = 4q = (61 * 4) = 224 units
The target quantity of jorjet = 3q = (61 *3) = 183units
The target sales of cotton = pq
=224*1000
=224000tk
The target sales of jorjet = pq
= 183*1200
=219600tk

“Fairy Tale Enterprise” contribution income statement for a particular month

(product-wise and total).

Here,
Particulars Cotton jorjet
Material 120000 105000
(TK300*400);(Tk350*300)
Add: Packaging 48000 42000
(tk120*400);(tk140*300)
Cost of goods sold 168000 147000

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 Fairy Tale Enterprise
Contribution Income Statement
For the year ended 31st December
Particulars Cotton jorjet Total
Sales(400*1000); (300*1200) 400000 360000 760000
Less: Variable Expenses
Cost of goods sold 168000 147000 315000

Printing (tk230*400);(tk250*300) 92000 75000 167000

Variable Shipping Expense 500 375 875
(tk1.25*400;300)
Total Variable Expense 260500 222375 482875
Contribution Margin 139500 137625 277125
(sales - Total Variable Expense)
Less: Fixed Expenses
Depreciation Expense _ _ 29000
Rent _ _ 200000
Fixed Shipping Expense 125

Total Fixed Cost 229125

NET OPERATING INCOME 139500 137625 48000

“Fairy Tale Enterprise” segmented income statement for a particular month

(Product-wise and total).
Particulars Cotton jorjet
Material 120000 105000
(TK300*400);(Tk350*300)
Add: Packaging 48000 42000
(tk120*400);(tk140*300)
Cost of goods sold 168000 147000

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 Fairy Tale Enterprise
Segmented Income Statement
For the year ended 31st December
Particulars Cotton jorjet Total
Sales(400*1000); (300*1200) 400000 360000 760000
Less: Variable operating Expenses
Cost of goods sold 168000 147000 315000

Printing (tk230*400);(tk250*300) 92000 75000 167000

Variable Shipping Expense 500 375 875
(tk1.25*400;300)
Total Variable Expense 260500 222375 482875

Segmented Contribution Margin 139500 137625 277125

(sales - Total Variable Expense)
Fixed Shipping Expense 125

Less: Common Fixed Expenses

Depreciation Expense _ _ 29000
Rent _ _ 200000
Total Fixed Expenses 229125
NET OPERATING INCOME 139500 137625 48000

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“Fairy Tale Enterprise” margin of safety in unit, in Tk. and in percentage

For cotton,
Margin of Safety in Unit= Actual Quantity-Break Even Quantity
= 400-168
=232
Margin of Safety in Tk. = Actual Sales-Break Even sales
=Tk (400000-168000)
=Tk 232000
Margin of Safety in Percentage= 232/400*100
=58%
For jorjet,
Margin of Safety in Unit= Actual Quantity-Break Even Quantity
= 300-126
=174
Margin of Safety in Tk. = Actual Sales-Break Even sales
=Tk (360000-151200)
=Tk 208800
Margin of Safety in Percentage= 174/300*100
=58%

“Fairy Tale Enterprise” the degree of operating leverage (DOL).

Degree of operating leverage (DOL) = Contribution Margin/Net operating Income

= 277125/48000

= 5.8 times

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If “Fairy Tale Enterprise” decide to raise the price of any product, how much profit
they expect to increase from this product (Applied DOL to find out the answer).

suppose the price of any of the product increases by 10%

DOL= 5.8 times
So, Profit increase by :5.8*10%
= 58%

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Conclusion and Recommendation
As we mentioned earlier, cost-volume-profit (CVP) analysis is a method that looks at the impact
that varying levels of costs and volume have on operating profit and it useful for managers
making short-term economic decisions. In this case, we tried to figure out how, “Fairy Tale
Enterprise” per month overall performance is by using CVP analysis.

By, using the data and resources we have gotten from “Fairy Tale Enterprise we tried to find out
all the costs that incurred in” Fairy Tale Enterprise” as well as the sales volume, relevant range,
target profit, variable and fixed cost, break-even quantity and sales, degree of operating leverage
and many more which are important for assessing the overall performance.

We have found from the analysis that to reach BEQ of cotton and jorjet, they have to sale 168
unit and 126 units respectively. Again, if they want to reach their target profit, the target quantity
of cotton and jorjet is 224 units and 183units on an individual basis which we think is not
impossible for them.As the DOL of this business is 5.8% which is quite good, it indicates that
company can increase its sales to gain extra profit.

Moreover, margin of safety of their business is 58%. Which is actually in good shape as it is a
safety cushion that protects a business against a loss. Therefore, we can state that the business is
actually in a profitable stage and can think for growth and make the business a bigger by
achieving its target profit and managing their cost smartly.

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