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Cost-Volume-Profit Analysis
Study of relationship between costs, volume, and
profits.
If 10% volume changed, what is the expected
change in profit?
Break even analysis A techniques of CVP
analysis
price and sell more units? What sales volume is required to meet the additional fixed charges arising from an advertising campaign? What will be the effect on the profit, where sales mix is changed? What will be the new-break-even point when there is change in prices, costs, volume, and sales mix? Which product or product mix is most profitable? Which product or product mix should be discontinued or not?
By Ghanendra Fago (M. Phil, MBA) For AIM
3
inventory.
No change in capacity and productivity.
technique of representing and studying the inter-relationship of the three basic components of CVP: cost, volume and profit. The break-even analysis determines a relationship between the revenues and costs with respect to volume. Break-even analysis is always taken as an important part of profit planning as it gives the planner many insights into the data with which he or she is working. It is a point where the profit is zero as the total revenues are equal to total costs. In other words, it is that level of activity (in units or in Rs.) at which revenue equals cost.
By Ghanendra Fago (M. Phil, MBA) For AIM
5
150
Particulars
40,000
60,000 50,000 10,000
40%
60%
even, the fixed cost can be divided by contribution margin contributed by each unit sold.
Break Even Point (in units)
= Fixed cost/CMPU
= .. units
= .. in Rupees
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Target sales volume to earn after tax (in units = FC+{(desired profit after tax) / (1-t)}/Contribution margin per unit
By Ghanendra Fago (M. Phil, MBA) For AIM
12
5. Profit on Sales
= Sales Variable Cost Fixed Cost = (Sales Rs. P/V Ratio) Fixed Cost = (Sales Units CMPU) Fixed Cost = Margin of Safety CMPU
6. Margin of Safety
= Actual Sales Break Even Sales = Margin of Safety/Actual sales = Profit/CMPU or PV ratio
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By Equation: Sales revenues = Fixed costs + variable costs + profit In units: x = FC + VC + Profit or, x = FC + VC ratio (x) + profit In Rs: Sales price (x) = FC + VC + profit or, sales price (x) = FC + VC rate (x) + profit
By Ghanendra Fago (M. Phil, MBA) For AIM
15
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reaction to the PV ratio i.e. decrease in variable cost result in increase in PV ratio, whereas increase in variable cost shall result in decrease in the PV ratio. A decrease in PV ratio results into higher BEP and reduced profit and vice-versa.
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