Presentation is loading. Please wait.

Presentation is loading. Please wait.

University of 6th of October, Egypt

Similar presentations


Presentation on theme: "University of 6th of October, Egypt"— Presentation transcript:

1 University of 6th of October, Egypt
Prepared by Dr.Hassan Sweillam University of 6th of October, Egypt

2 9 Cost-Volume-Profit (CVP) Analysis Definition:
Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned with the effect of sales volume and product costs on operating profit of a business. It deals with how operating profit is affected by changes in variable costs, fixed costs, selling price per unit In other words it’s a mathematical equation that computes how changes in costs and sales will affect income in future periods.

3 Cost-Volume-Profit (CVP) Analysis
CVP also examines the behavior of total revenue, total cost, and net income as changes occur in the unit sale price, unit variable cost, total fixed cost, and the output volume. CVP analysis is a method of cost accounting that is concerned with the impact varying levels of sales and product costs will have on operating profit.

4 Cost-Volume-Profit (CVP) Analysis
They also use cost volume profit analysis to calculate the break-even point in production processes and sales. This is a key concept because it shows management that the revenue from a project will be able to cover all the costs associated with it. Using a variation of the CVP, management can calculate the break-even point in profits, units, and even dollars.

5 Cost-Volume-Profit (CVP) Analysis
- Basic CVP Formula: The basic CVP formula is the price per unit multiplied by the number of units sold equals the sum of total variable costs, total fixed costs and accounting profit. The basic formula used in CVP Analysis is derived from profit equation: Px = Vx + FC + Profit In the above formula,    p is price per unit;    v is variable cost per unit;    x are total number of units produced and sold; and    FC is total fixed cost

6 Cost-Volume-Profit (CVP) Analysis
CVP analysis also manages product contribution margin. Contribution margin is the difference between total sales and total variable costs. Contribution Margin (CM) is equal to the difference between total sales (S) and total variable cost or, in other words, it is the amount by which sales exceed total variable costs (VC). In order to make profit the contribution margin of a business must exceed its total fixed costs. In short: CM = S − VC .

7 Cost-Volume-Profit (CVP) Analysis
The unit contribution margin ( Unit CM) is simply the unit variable cost subtracted from the unit sales price. The contribution margin may also be calculated per unit. Contribution Margin can also be calculated per unit which is called Unit Contribution Margin. It is the excess of sales price per unit (p) over variable cost per unit (v). Thus: Unit CM = p − v The contribution margin ratio is determined by dividing the contribution margin by total sales.

8 (Contribution Margin) Income Statement:
Sales(units sold * unit sale price) xxxxx (-) Total Variable Cost (units sold * unit variable cost) (xxxxx) ______ Contribution Margin xxxxx (-) Total fixed cost (xxxxx) Net operating income xxxxx

9 Case: Unit sale price $50 Unit variable cost $30
Prepare contribution margin income statement for 6,000, 8,000, 10,000, 12000, and 14,000 units of sales. Unit sale price $50 Unit variable cost $30 Total fixed cost $200,000

10 TVC: Total variable cost TCM: Total contribution margin
Units of sales 6,000 8,000 10,000 12,000 14,000 Sales $300,000 $400,000 $500,000 $600,000 $700,000 (-)TVC $180,000 $240,000 $360,000 $420,000 TCM $120,000 $160,000 $200,000 $280,000 (-)TFC NI(NL) $80,000 $40,000 TVC: Total variable cost TCM: Total contribution margin TFC: Total fixed cost NI (NL): Net income (Net loss)

11 (-) Unit variable cost ($30) 60% Unit contribution margin $20 40%
Variable cost % and contribution margin% are percentages of sales. Each unit sold participates by $20 (or 40% of sale price) to the coverage of fixed costs and making income. Unit sale price $ % (-) Unit variable cost ($30) % Unit contribution margin $ %

12 Cost-Volume-Profit (CVP) Analysis
The contribution margin ratio (CM Ratio) It is determined by dividing the contribution margin by total sales. Contribution Margin Ratio is calculated by dividing contribution margin by total sales or unit CM by price per unit. CM CM unit CM Ratio = OR TS SP unit

13 Cost-Volume-Profit (CVP) Analysis
The Break-Even point definition: The break-even point (in units of sales or in sales dollars) is the point at which total sales is equal to total cost (total variable cost + total fixed cost). Also, it is the point at which total contribution margin is equal to total fixed cost.

14 Cost-Volume-Profit (CVP) Analysis
Breakeven Point of Sales The contribution margin is used in the determination of the breakeven point of sales. By dividing the total fixed costs by the contribution margin ratio, the breakeven point of sales in terms of total dollars may be calculated. Total fixed costs (expenses) Break-even units= Unit contribution margin Total fixed expenses Break-even sales dollars= Contribution margin %


Download ppt "University of 6th of October, Egypt"

Similar presentations


Ads by Google