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CVP Analysis
CVP Analysis
Contribution margin
= contribution margin per unit * number of units sold
0 1 5 25 40
Revenues at Rs.200 per package Rs.0 Rs.200 Rs.1,000 Rs.5,000 Rs.8,000
Variable costs at Rs.120 per package 0 120 600 3,000 4,800
CM at Rs.80 per package 0 80 400 2,000 3,200
Fixed costs 2,000 2,000 2,000 2,000 2,000
Operating income (2,000) (1,920) (1,600) 0 1,200
CM percentage (CM ratio) / PV ratio
= CM per unit / selling price OR
= total CM / total revenue
25
Revenues at Rs.200 per package Rs.5,000
Variable costs at Rs.120 per package 3,000
CM at Rs.80 per package 2,000
Fixed costs 2,000
Operating income 0
Breakeven Point (BEP)
Breakeven Revenues
= FC / CM %
= 2,000 / 0.40
= Rs.5,000
Breakeven Chart
Operating
Total Revenue
income
FC
FC
25 units
TNI
FC +
1 – tax rate
Q =
CMU
960
2,000 +
1 – 0.40
Q =
80
= 45 units
Target Net Income
TNI
FC +
Desired 1 – tax rate
revenue =
CM %
960
2,000 +
1 – 0.40
Q =
o.40
= Rs.9,000
Target Net Income
45
Revenues at Rs.200 per package Rs.9,000
Variable costs at Rs.120 per package 5,400
CM at Rs.80 per package 3,600
Fixed costs 2,000
Operating income 1,600
Income tax @ 40% 640
Net income 960
40 44 Difference
CM at Rs.80 per package Rs.3,200 Rs.3,520 Rs.320
Fixed costs 2,000 2,500 500
Operating income 1,200 1,020 (180)
Decision to reduce selling price
Having decided not to advertise, Mamta is contemplating
whether to reduce selling to Rs.175
At this price she anticipates to sell 50 units
At this quantity, the software whole-seller who supplies Do-
All Software will sell packages to Mamta for Rs.115 per
unit instead of Rs.120
Should Mamta reduce the selling price?
New CM per unit= 175 – 115 = Rs.60
CM from lowering selling price 50 units * Rs.60 Rs.3,000
Original CM 40 units * Rs.80 Rs.3,200
Change in CM from lowering selling price (Rs.200)
Decision to reduce selling price
Mamta can examine other alternatives to increase OI
Such as,
Simultaneously increasing advertising costs and lowering
prices
In each case, she will compare the changes in CM (through
the effects on SP, VC and quantities of units sold) to the
changes in FC
Alternative FC & VC structures
Suppose Computer Conventions offers Mamta three rental
alternatives:
Option 1 Rs.2,000 fixed fee
Option 2 Rs.800 fixed fee plus 15% of convention
revenues
Option 3 25% of convention revenues with no fixed fee
Option # 1
0 16 20 25 40 60
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Revenues at 0 3,200 4,000 5,000 8,000 12,000
Rs.200 per package
Variable costs at 0 1,920 2,400 3,000 4,800 7,200
Rs.120 per package
CM at Rs.80 0 1,280 1,600 2,000 3,200 4,800
per package
Fixed costs 2,000 2,000 2,000 2,000 2,000 2,000
Operating income (2,000) (720) (400) 0 1,200 2,800
Option # 2
Selling price Rs.200
VC PU= purchase price 120 + rent 15% of revenue
VC PU = 120 + 20 = Rs.150
FC Rs. 800
0 16 20 25 40 60
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Revenues at 0 3,200 4,000 5,000 8,000 12,000
Rs.200 per package
Variable costs at 0 2,400 3,000 3,750 6,000 9,000
Rs.150 per package
CM at Rs.50 0 800 1,000 1,250 2,000 3,000
per package
Fixed costs 800 800 800 800 800 800
Operating income (800) 0 200 450 1,200 2,200
Option # 3
Selling price Rs.200
VC PU= purchase price 120 + rent 25% of revenue
VC PU = 120 + 50 = Rs.170
FC Rs. 0
0 16 20 25 40 60
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Revenues at 0 3,200 4,000 5,000 8,000 12,000
Rs.200 per package
Variable costs at 0 2,720 3,400 4,250 6,800 10,200
Rs.170 per package
CM at Rs.30 0 480 600 750 1,200 1,800
per package
Fixed costs 0 0 0 0 0 0
Operating income 0 480 600 750 1,200 1,800
SP VC PU CMPU
Option 1 Rs. 200 – Rs.120 = Rs.80
Option 2 Rs.200 – Rs.150 = Rs.50
Option 3 Rs.200 – Rs.170 = Rs.30
Option 1 has highest CM per unit, because of its low VC per
unit
Once FC are fully recovered at sale of 25 units, each
additional unit sold adds Rs.80 of CM and, therefore,
Rs.80 of OI per unit
The risk-return tradeoff across alternative cost structures
can be measured as operating leverage
Operating leverage describes the effects that FC have on
changes in operating income