Professional Documents
Culture Documents
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Elements:
1. Prices of products
2. Volume or level of activity
3. Per unit variable cost
4. Total fixed costs
5. Mix of product sold
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Because CVP analysis helps managers to understand
the interrelationships among cost, volume, and profit,
it is a vital tool in many business decisions. These
decisions includes
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To help understand the role of CVP analysis in Business
decisions, consider the numbers of issues are to be
analyzed such as:
The equation method and the contribution margin method are most
useful when managers want to determine operating income at
few specific levels of sales. The graph method helps managers
visualize the relationship between units sold and operating
income over a wide range of quantities of units sold.
Ref : Cost Accounting-C T Horngren, p:68
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Cost – Volume – Profit analysis may be shown in
Mathematical Equation, few formulas are given
below:
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6) BEP (Sales Value) =
Or
Or
Or
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Formulas (cont…)
7) Margin safety = Actual Sales – Break
Even Sales
8) Margin of safety = Profit ÷
9) Margin of safety =
10) Profit / Volume Ratio =
11) Sales =
12) Marginal Income = sales × P/V Ratio
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Problem #01
Jamuna Company Limited is currently
working at 50% capacity and produces 1,
00, 000 units. At 60% working, Raw
Material cost increases by 2% and selling
price falls by 2%. At 80% working Raw
Material cost increases by 5% and selling
price falls 5%.
At 50% capacity working, the product
costs Tk. 180 per unit and is sold TK. 200
per Unit.
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The unit cost of Tk. 180 is made up
as follows:
Material 100/-
Wages 30/-
Factory Overheads 30/- (40% Fixed)
Administrative Overheads 20 /-(50% Fixed)
Total 180/-
C. Contribution (A-B) 42 42, 00, 000 36 43, 20, 000 27 43, 20, 000
D. Fixed Cost
Factory Overheads (40%Fixed) 12 12, 00, 000 10 12, 00, 000 7.5 12, 00, 000
Administrative Overheads(50% 10 10, 00, 000 8.33 10, 00, 000 6.25 10, 00, 000
Fixed)
Total Fixed Cost 22 22, 00, 000 18.33 22, 00, 000 13.75 22, 00, 000
E. Profit (C-D) 20 20, 00, 000 17.67 21, 20, 000 13.25 21, 20, 000 12
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Recommendations:
ifwe look on the above statement, as
an expert my recommendation will be
produced at 60% capacity which is
also providing same profit as per
80% capacity.
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Problem # 02
You are given the following information for the Nokia Limited for the
next year;
Tk.
Sales (1,00,000 units) 60,00,000
Variable Costs 24,00,000
Fixed Costs 30,00,000
Required :
A) Find out the P/V ratio, Break Even Point and Margin of Safety
B) Evaluate the effect of :
i) 10% decrease in variable cost.
ii)10 % increase in variable cost.
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Solution
A) Calculation of P/V ratio , Break Even Point and Margin of Safety :
100
30,00,000
Tk. 50,00,000
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B) i) 10% Decrease in variable cost :
P/V Ratio
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