Cost-Volume-Profit (CVP) Analysis

• Traditional Format Income Statement (External Reporting Purpose):

Net Sales-COGS=Gross Profit -Operating Expense =NOI

• CM Format Income Statement (Internal Management Reporting Purpose)

Net Sales-Variable Expense=Contribution Margin (CM)-Fixed Expense=NOI

 Formulae
• Contribution Margin (CM)=Selling Price (SP)-Variable Expense
• CM Ratio=(CM/SP)*100
• Variable Expense Ratio=(100-CM Ratio)
• Break Even Point (BEP) in unit=Fixed Expense/CM per unit
• BEP (in sales amount)=Fixed Expense/CM Ratio
• Required Units with Target Profit (TP)=(Fixed Exp.+TP)/CM per unit
• Required Sales amount with TP=(Fixed Exp.+TP)/CM Ratio
• Margin of Safety (MOS)=Actual Sales-BEP Sales
• MOS Ratio=(MOS/Actual Sales)*100
• Degree of Operating Leverage (DoL)=CM/NOI
Review Problem

• 1. CMR=(15/60)*100=25%
VER=(45/60)*100=75% or (100-CMR)%=75%
• 2. BEP (units)=FE/CM per Unit=(240,000/15)=16,000
BEP (sales Tk)=FE/CMR=(240,000/25%)=960,000
• 3. If sales increases by 4,00,000 Taka, NOI will increase by
(400000*25%)=100,000.
• 4. Req. Units=(FE+TP)/CM per unit=[(240,000+90,000)/15]=22,000
• 5. MOS=Actual Sales –BEP Sales=12,00,000-960,000=240,000
MOS Ratio=(MOS/Actual Sales)*100=(240,000/12,00,000)*100=20%
• 6. DOL=CM/NOI=(300,000/60,000)=5
• If sales increases by 8%, NOI will increase by (8%*5)=40%
• New NOI will be 60,000+ (60,000*40%)=84,000
 P5-20
1. CMR=(10/25)*100=40%
BEP (units)=FE/CM per unit=210,000/10=21,000
DOL=CM/NOI=300,000/90,000=3.33
2. New CMR=(7/25)*100=28%
New BEP units=210,000/7=30,000
3. Required units of sales=(FE+TP)/CM per unit= (210,000+90,000)/7=42858
4. VE Ratio=.6, Per units Variable Exp. 18; SP=18/.6=30
SP per unit should increase by 30-25=5.
5. New VE per unit=15-(40%*15)=9, New FE=210,000*2=420,000
New CMR=(16/25)*100=64%
BEP units=420,000/16=26250
P5-20

6. a) Req. Units=(FE+TP)/CM per units=(420,000+90,000)/16=31,875

b) Sales (30,000*25) =750,000
Less: Var. Exp. (30,000*9) =270,000
CM =480,000
Fixed Exp. =420,000
NOI =60,000

DOL=480,000/60000=8

c) No as NOI decreases by 30,000 Taka.

 Multi-Product BEP
• 1. Calculate overall (combined) CMR=(Total CM/Total Sales)*100

• 2. Determine Combined BEP (sales)=Total FE/Overall CMR

• 3. Calculate current sales mix ratio

• 4. Determine Product-wise BEP (sales) diving combined BEP as per

current sales mix ratio.

Assumption: Current Sales mix always remain constant.

Pg. 229 (Problem 5-12)
Req. 2. Total CM=(150000*80%)+(250000*36%)=210,000
Overall CMR=(210,000/400,000)*100=52.50%
Overall BEP(sales)=183,750/52.50%=350,000

Sales Mix: FD=(150,000/400,000)=37.50%

Sales Mix of SS=(250,000/400,000)=62.50%

BEP (sales) of FD=350,000*37.50=131250

BEP (sales) of SS=350,000*62.50%=218,750

Pg. 229 (Problem 5-12)
Req. 3. If sales increase by 100,000, NOI will increase by
(100,000*52.50%) =52,500

Underlying assumption: Current sales mix ratio remains constant.

Mixed Cost and Cost Estimate Through Cost Equation
Mixed Cost=FC+VC
Total Cost=Fixed Cost + Variable Cost
Total Cost (Y)=Fixed Cost (a)+ Per Unit VC (b)*No. of Units

Therefore, Cost Estimation Equitation: Y=a+bx

a= Total FC, b=per unit VC, x=No. of units

Straight Line Equation: Y=a+bx (a=intercept, b=slope)

Three Methods: From Mixed Cost to Cost
Estimation Equation
• 1. Scatter-graph Method

• 2. High-Low Method

• 3. Least Square Method

Next Class
• 1. Cost Estimation Equation

• 2. Practice from CVP Analysis (Single Product & Multi-Product)

2. High-Low Method: Pg. 242
• Y=a+bx
• Pg. 242
• b= (HC-LC)/(HU-LU)
• b=(9800-7400)/(8000-5000)=0.8
• a= 9800-(8000*0.8)=3400
Alternatively,
• a=74000-(5000*.8)=3400
• Y=3400+0.8x
• Total Estimated Cost of August (x=7500): TC(Y)=3400+(.8*7500)=9400
 Pg-250 (5A-4)

• b=(2700-1200)/(8-2)=250

• a=2700-(8*250)=700

• i) Y=700+250x

• ii) If units (x) of August is 12, Est. Cost (y)=700+250*12=3700

3. Least Square Method
• Pg-245 (Formulae)

• Pg-251 (5A-5)
• Sum X=30, Sum Y=120, Sum XY=643, Sum X*X=178, n=6
• b={(6*643)-(30*120)}/{(6*178)-(30*30)}=1.5357
• a={120-(1.5357*30)}/6=12.32
• i) y=12.32+1.5357x
• ii) Expected cost of next week (x=5):y=12.32+(1.5357*5)=20
Do 5A-4 using Least Square Method
Pg. 234 (Poblem5-23)
5)
CM from Additional Sales (5000*10) =50,000
(-)CM Lost from Existing Sales (20,000*2) =(40,000)
(-) Additional Fixed Expenses =(30,000)
Net Surplus (Deficit) = (20,000)
6)
(25000*11) –FC=60,000
FC=215,000
So, max. Advertisement Exp. can be increased by (215000-180,000)=35,000