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Summary Cost, volume, profit
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COST, VOLUME,PROFIT ANALYSIS
(CVP)
,FORMULA SHEET
Break even point in units Break even in Rands Profit volume ratio (contribution ratio)
= fixed cost / contribution pu = fixed cost / contribution ratio = contribution pu / sales price pu
=%
OR
0= SPx – Bx – A
Required volume to achieve target Sensitivity analysis Safety margin
= (fixed cost + target profit) / = (fixed cost + target profit ) / = (expected sales – Break even point) /
contribution per unit contribution PU expected sales
OR OR
Target profit = SPx – Bx – A Target profit = (BE volume x
contribution PU) + (additional
volume x contribution PU) – fixed
cost
Operating leverage Degree of operating leverage (DOL) Contribution = SP – variable costs
= contribution margin / net income = % change in sales x % change in net
income
Turnover = no. x sales price
,Objective of CVP analysis
• Is a method where management of an organization examines the relationship between changes in activity
(outputs) and changes in total revenue, expenses and net profit (ie changes in its cost and revenue structures)
• PURPOSE
o Is to determine the impact a change in any variable will have on profits so that management can better
manage its financial results
Examples of components from analysis :
1) How many units will be sold before break-even (break even point)
2) What would be the effect on profits if I reduce my selling price and sell more units
a. Sensitivity analysis (consider the effect on NP before and after accepting the project)
3) How should I pay my sales staff
a. Fixed salary , commission or combination
, CVP graph
- Analysis is done over the short term and within a relevant range
- WE DON’T NEED TO BE ABLE TO DRAW A GRAPH (just interpret items ON graph)
- Why a short term
o This is because costs only remain constant over a short period
- Relevant range
o A range where costs are constant
o In the graph fixed costs is constant for a number of
units
o For example
▪ The company rents a machine that can produce
1000 units (Q1) but if they want to produce
additional units an additional machine is
required which increases costs
- Selling price and variable cost per unit and total fixed cost remain CONSTANT within a relevant range
- When we do a CVP analysis – always assume a linear relationship between total cost and revenue as the
output/volume changes
NO profit or loss = break even point (income=expenses)
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