Cost-Volume-Profit (CVP) Analysis • Traditional Format Income Statement (External Reporting Purpose): Net Sales-COGS=Gross Profit -Operating Expense =NOI • CM Format Income Statement (Internal Management Reporting Purpose) Net Sales-Variable Expense=Contribution Margin (CM)-Fixed Expense=NOI Formulae • Contribution Margin (CM)=Selling Price (SP)-Variable Expense • CM Ratio=(CM/SP)*100 • Variable Expense Ratio=(100-CM Ratio) • Break Even Point (BEP) in unit=Fixed Expense/CM per unit • BEP (in sales amount)=Fixed Expense/CM Ratio • Required Units with Target Profit (TP)=(Fixed Exp.+TP)/CM per unit • Required Sales amount with TP=(Fixed Exp.+TP)/CM Ratio • Margin of Safety (MOS)=Actual Sales-BEP Sales • MOS Ratio=(MOS/Actual Sales)*100 • Degree of Operating Leverage (DoL)=CM/NOI Review Problem • 1. CMR=(15/60)*100=25% VER=(45/60)*100=75% or (100-CMR)%=75% • 2. BEP (units)=FE/CM per Unit=(240,000/15)=16,000 BEP (sales Tk)=FE/CMR=(240,000/25%)=960,000 • 3. If sales increases by 4,00,000 Taka, NOI will increase by (400000*25%)=100,000. • 4. Req. Units=(FE+TP)/CM per unit=[(240,000+90,000)/15]=22,000 • 5. MOS=Actual Sales –BEP Sales=12,00,000-960,000=240,000 MOS Ratio=(MOS/Actual Sales)*100=(240,000/12,00,000)*100=20% • 6. DOL=CM/NOI=(300,000/60,000)=5 • If sales increases by 8%, NOI will increase by (8%*5)=40% • New NOI will be 60,000+ (60,000*40%)=84,000 P5-20 1. CMR=(10/25)*100=40% BEP (units)=FE/CM per unit=210,000/10=21,000 DOL=CM/NOI=300,000/90,000=3.33 2. New CMR=(7/25)*100=28% New BEP units=210,000/7=30,000 3. Required units of sales=(FE+TP)/CM per unit= (210,000+90,000)/7=42858 4. VE Ratio=.6, Per units Variable Exp. 18; SP=18/.6=30 SP per unit should increase by 30-25=5. 5. New VE per unit=15-(40%*15)=9, New FE=210,000*2=420,000 New CMR=(16/25)*100=64% BEP units=420,000/16=26250 P5-20 6. a) Req. Units=(FE+TP)/CM per units=(420,000+90,000)/16=31,875 b) Sales (30,000*25) =750,000 Less: Var. Exp. (30,000*9) =270,000 CM =480,000 Fixed Exp. =420,000 NOI =60,000 DOL=480,000/60000=8 c) No as NOI decreases by 30,000 Taka. Multi-Product BEP • 1. Calculate overall (combined) CMR=(Total CM/Total Sales)*100 • 2. Determine Combined BEP (sales)=Total FE/Overall CMR • 3. Calculate current sales mix ratio • 4. Determine Product-wise BEP (sales) diving combined BEP as per current sales mix ratio. Assumption: Current Sales mix always remain constant. Pg. 229 (Problem 5-12) Req. 2. Total CM=(150000*80%)+(250000*36%)=210,000 Overall CMR=(210,000/400,000)*100=52.50% Overall BEP(sales)=183,750/52.50%=350,000 Sales Mix: FD=(150,000/400,000)=37.50% Sales Mix of SS=(250,000/400,000)=62.50% BEP (sales) of FD=350,000*37.50=131250 BEP (sales) of SS=350,000*62.50%=218,750 Pg. 229 (Problem 5-12) Req. 3. If sales increase by 100,000, NOI will increase by (100,000*52.50%) =52,500 Underlying assumption: Current sales mix ratio remains constant. Mixed Cost and Cost Estimate Through Cost Equation Mixed Cost=FC+VC Total Cost=Fixed Cost + Variable Cost Total Cost (Y)=Fixed Cost (a)+ Per Unit VC (b)*No. of Units Therefore, Cost Estimation Equitation: Y=a+bx a= Total FC, b=per unit VC, x=No. of units Straight Line Equation: Y=a+bx (a=intercept, b=slope) Three Methods: From Mixed Cost to Cost Estimation Equation • 1. Scatter-graph Method • 2. High-Low Method • 3. Least Square Method Next Class • 1. Cost Estimation Equation • 2. Practice from CVP Analysis (Single Product & Multi-Product) 2. High-Low Method: Pg. 242 • Y=a+bx • Pg. 242 • b= (HC-LC)/(HU-LU) • b=(9800-7400)/(8000-5000)=0.8 • a= 9800-(8000*0.8)=3400 Alternatively, • a=74000-(5000*.8)=3400 • Y=3400+0.8x • Total Estimated Cost of August (x=7500): TC(Y)=3400+(.8*7500)=9400 Pg-250 (5A-4) • b=(2700-1200)/(8-2)=250 • a=2700-(8*250)=700 • i) Y=700+250x • ii) If units (x) of August is 12, Est. Cost (y)=700+250*12=3700 3. Least Square Method • Pg-245 (Formulae) • Pg-251 (5A-5) • Sum X=30, Sum Y=120, Sum XY=643, Sum X*X=178, n=6 • b={(6*643)-(30*120)}/{(6*178)-(30*30)}=1.5357 • a={120-(1.5357*30)}/6=12.32 • i) y=12.32+1.5357x • ii) Expected cost of next week (x=5):y=12.32+(1.5357*5)=20 Do 5A-4 using Least Square Method Pg. 234 (Poblem5-23) 5) CM from Additional Sales (5000*10) =50,000 (-)CM Lost from Existing Sales (20,000*2) =(40,000) (-) Additional Fixed Expenses =(30,000) Net Surplus (Deficit) = (20,000) 6) (25000*11) –FC=60,000 FC=215,000 So, max. Advertisement Exp. can be increased by (215000-180,000)=35,000