7th January,2011
To,
Nazmul Hasan
Faculty
School of Business
University of Information Technology & Sciences
SUBJECT: SUBMISSION OF ACT-341 Research paper.
Dear Sir
In the following pages, we have presented ACT 341, which you have authorized us to prepare
and submit by 7th January ACT 341 course requirement. This particular report has given us
the opportunity to get hands on experience regarding different entry modes of cost volume
profit. We are tremendously thankful to you for giving us the opportunity to learn the
practical skills during the course.
We have enjoyed preparing the research paper though it was challenging to finish within the
given time. In preparing this research paper, we have tried our level best to include all the
relevant information and tried to identify different cost volume profit analysis.
Sincerely your,
Md.jaforullahjony
Id.08510077
Dept-BBA
1
Table of contents
SL
Particulars
Page
1.
Letters of transmittal
1
2.
Table of contents
2
3.
Introduction
3
4.
Objective
4
5.
About cost volume profit analysis
5-9
6.
Article of cost volume profit analysis
10-19
7.
Analysis of Literature review
20
8.
Findings of study
21
9.
SWOT Analysis
22
10.
Components of CVP Analysis
23
11.
Conclusion & Recommendations
24
12.
Appendix
25
2
INTRODUCTION
Cost-Volume-Profit Analysis (CVP), in managerial economics is a form of cost accounting. It
is a simplified model, useful for elementary instruction and for short-run.Cost-volume-profit
(CVP) analysis expands the use of information provided by breakeven analysis. A critical
part of CVP analysis is the point where total revenues equal total costs (both fixed and
variable costs). At this breakeven point (BEP), a company will experience no income or loss.
This BEP can be an initial examination that precedes more detailed CVP analyses.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis
Cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the volume
level at which total revenues are equal to total costs. When total costs and total revenues are
equal, the business organization is said to be "breaking even." The analysis is based on a set
of linear equations for a straight line and the separation of variable and fixed costs.
Total variable costs are considered to be those costs that vary as the production volume
changes. In a factory, production volume is considered to be the number of units produced,
but in a governmental organization with no assembly process, the units produced might refer,
for example, to the number of welfare cases processed.
There are a number of costs that vary or change, but if the variation is not due to volume
changes, it is not considered to be a variable cost. Examples of variable costs are direct
materials and direct labor. Total fixed costs do not vary as volume levels change within the
relevant range. Examples of fixed costs are straight-line depreciation and annual insurance
charges. Total variable costs can be viewed as a 45 line and total fixed costs as a straight line.
In the break-even chart shown in Figure 1, the upward slope of line DFC represents the
change in variable costs. Variable costs sit on top of fixed costs, line DE. Point F represents
the breakeven point. This is where the total cost (costs below the line DFC) crosses and is
equal to total revenues (line AFB).
3
OBJECTIVE
Farm manager could not know which products would sell best. Nevertheless, it was necessary
for them to make decisions about the types and volumes of products to manufacture. They
forecast the number and type of products that would sell and then made production decisions
accordingly. The following discussion summarizes key issues in decision-making process.
Knowing. Knowledge about consumer markets, competition, production processes, and costs
were critical when managers decided which product to emphasize. Calico needed this
knowledge for its potential markets—dolls, computers, and games. Given the company’s
experience, its knowledge was probably greater for producing Adam than for Cabbage Patch
Dolls. However, doll manufacturing was a relatively simple process compared to producing
computers.
Identifying - Companies commonly face major uncertainties in their product markets,
particularly in the toy industry where competition is often fierce and consumer tastes change
rapidly. However, uncertainties were greater than most because of the relatively new—and
competitive—computer market. For example, the managers did not know:
_ How quickly consumers would embrace computers
_ What would persuade consumers to purchase a first computer
_ How quickly computer technology and competition would change
_ exactly how much the computers would cost to produce
Exploring - Managers faced a difficult task in adequately exploring their decision to
emphasize Adam over Cabbage Patch Dolls. However, thorough analysis is crucial for this
type of decision. For example, the managers needed to do the following:
Anticipate which product would sell best. Although market research helps managers estimate
product demand, they would still have considerable uncertainty about actual product sales.
Avoid biased forecast and analyses. Managers often have emotional attachments to sunk
costs, such as the large investment already made in Adam that should not affect decision
making.
4
Contribution margin and contribution margin ratio
Key calculations when using CVP analysis are the contribution margin and the contribution
margin ratio. The contribution margin represents the amount of income or profit the company
made before deducting its fixed costs. Said another way, it is the amount of sales dollars
available to cover (or contribute to) fixed costs. When calculated as a ratio, it is the percent of
sales dollars available to cover fixed costs. Once fixed costs are covered, the next dollar of
sales results in the company having income.
The contribution margin is sales revenue minus all variable costs. It may be calculated using
dollars or on a per unit basis. If The Three M's, Inc., has sales of $750,000 and total variable
costs of $450,000, its contribution margin is $300,000. Assuming the company sold 250,000
units during the year, the per unit sales price is $3 and the total variable cost per unit is $1.80.
The contribution margin per unit is $1.20. The contribution margin ratio is 40%. It can be
calculated using either the contribution margin in dollars or the contribution margin per unit.
To calculate the contribution margin ratio, the contribution margin is divided by the sales or
revenues amount.
5
Break-even point
The break-even point represents the level of sales where net income equals zero. In other
words, the point where sales revenue equals total variable costs plus total fixed costs, and
contribution margin equals fixed costs. Using the previous information and given that the
company has fixed costs of $300,000, the break-even income statement shows zero net
income.
The Three M's, Inc. Break-Even Income Statement
Revenues (250,000 units × $3)
$750,000
Variable Costs (250,000 units × $1.80) 450,000
Contribution Margin
300,000
Fixed Costs
300,000
Net Income
$0
This income statement format is known as the contribution margin income statement and is
used for internal reporting only.
The $1.80 per unit or $450,000 of variable costs represent all variable costs including costs
classified as manufacturing costs, selling expenses, and administrative expenses. Similarly,
the fixed costs represent total manufacturing, selling, and administrative fixed costs.
Break-even point in dollars. The break-even point in sales dollars of $750,000 is calculated
by dividing total fixed costs of $300,000 by the contribution margin ratio of 40%.
Another way to calculate break-even sales dollars is to use the mathematical equation.
In this equation, the variable costs are stated as a percent of sales. If a unit has a $3.00 selling
price and variable costs of $1.80, variable costs as a percent of sales is 60% ($1.80 ÷ $3.00).
Using fixed costs of $300,000, the break-even equation is shown below.
6
The last calculation using the mathematical equation is the same as the break-even sales
formula using the fixed costs and the contribution margin ratio previously discussed in this
chapter.
Break-even point in units. The break-even point in units of 250,000 is calculated by dividing
fixed costs of $300,000 by contribution margin per unit of $1.20.
The break-even point in units may also be calculated using the mathematical equation where
“X” equals break-even units.
Again it should be noted that the last portion of the calculation using the mathematical
equation is the same as the first calculation of break-even units that used the contribution
margin per unit. Once the break-even point in units has been calculated, the break-even point
in sales dollars may be calculated by multiplying the number of break-even units by the
selling price per unit. This also works in reverse. If the break-even point in sales dollars is
known, it can be divided by the selling price per unit to determine the break-even point in
units.
7
Targeted income
CVP analysis is also used when a company is trying to determine what level of sales is
necessary to reach a specific level of income, also called targeted income. To calculate the
required sales level, the targeted income is added to fixed costs, and the total is divided by the
contribution margin ratio to determine required sales dollars, or the total is divided by
contribution margin per unit to determine the required sales level in units.
Using the data from the previous example, what level of sales would be required if the
company wanted $60,000 of income? The $60,000 of income required is called the targeted
income. The required sales level is $900,000 and the required number of units is 300,000.
Why is the answer $900,000 instead of $810,000 ($750,000 [break-even sales] plus
$60,000)? Remember that there are additional variable costs incurred every time an
additional unit is sold, and these costs reduce the extra revenues when calculating income.
8
This calculation of targeted income assumes it is being calculated for a division as it ignores
income taxes. If a targeted net income (income after taxes) is being calculated, then income
taxes would also be added to fixed costs along with targeted net income.
Assuming the company has a 40% income tax rate, its break-even point in sales is $1,000,000
and break-even point in units is 333,333. The amount of income taxes used in the calculation
is $40,000 ([$60,000 net income ÷ (1 – .40 tax rate)] – $60,000).
A summarized contribution margin income statement can be used to prove these calculations.
The Three M's, Inc. Income Statement 20X0 Targeted Net Income
Sales (333,333 * units × $3)
$1,000,000
Variable Costs (333,333 * units × $1.80)
600,000
Contribution Margin
400,000
Fixed Costs
300,000
Income before Taxes
100,000
Income Taxes (40%)
40,000
Net Income
$ 60,000
9
LECTURER REVIEW
ARTICLE 1
Author: Jay Hickman
Cost volume profit analysis
Running a successful small business requires adept navigation of the many choices created by
an ever changing market place. Cost Volume Profit Analysis (CVPA) is an effective tool that
can help its user answer important questions such as "what price should I charge for this
product or that service?", "which of my products or services is most profitable?", and "what is
the best operating leverage level for my business given current market conditions?"
Understanding Fixed and Variable Costs
Before the CVPA can be used, fixed, semi-variable and variable costs must be determined.
Determining these costs is a very useful tool in itself, but that's another white paper.
Fixed costs are those costs that your business incurs regardless of sales volume. These are
costs such as rent, insurance, and annual business licensing fees. Sales volume, not exceeding
your current capacity, has no effect.
Variable costs are those costs that are directly affected by sales volume. These include items
such as cost-of-goods sold, sales commissions, and travel expenses, if you are a service
provider that travels as a result of service provision.
Break-Even
There are several benefits to using CVPA. First, it shows what the break-even point, in units
or dollars, for a given product or service is, given a specified sales price. Break-even is the
point at which sales revenue covers all fixed costs for the year plus all variable costs up to
that sales point. For example, if fixed costs for the year are $1,000, variable costs per unit
total $1.00, and the product is priced at $5.00, then 250 units must be sold to cover fixed and
variable costs totaling $1,250.
As you may have noticed, not only does CVPA show break-even, but it can be used for
analyzing price sensitivity. For instance, if your competitor is able to price the same product
at $2.50, but you are not able to go below $3.00, then it may be time to consider several
options: discontinue the product, find a way to reduce fixed and variable costs so you can
price it at $2.50, tweak the product in some way that distinguishes it in a positive way from
your competitor's-a square hamburger vs. a round hamburger-or use the product as a "loss
leader" to get customers in the door.
Contribution Margin
Determining the contribution margin for your business is an additional benefit of CVPA.
Contribution margin is simply the amount of each sales dollar left after all variable costs have
been covered. It is that portion of the sales dollar that can be devoted to covering fixed costs.
10
Knowing your overall contribution margin is beneficial because it can be compared to prior
periods to determine if it is trending positively or negatively. Additionally contribution
margin analysis can be applied to individual products, product lines, services, or service lines.
Knowing the contribution margin of a particular product or service can help determine if
carrying that product or performing that service over another is the best decision. Moreover,
understanding contribution margin is very helpful in developing the best pricing strategy for
your business.
Operating Leverage
In gaining an understanding of operating leverage, let's reconsider our hypothetical auto body
shop owner. She has seen her maintenance and service expense increase because of all the
additional use her machinery is getting due to a recent and significant up-trend in sales.
She is faced with a decision: should she invest in additional fixed assets to handle the
additional sales volume or just continue with her current fixed asset platform?
Without understanding operating leverage, this business owner doesn't have valuable
information that could help her make the best decision. Operating leverage is the degree to
which a business uses fixed costs to generate profit. The greater the degree of fixed cost
reliance, the greater the increase in profits during a sales up-trend and the greater the loss in a
sales down-trend.
Article 2: How to include earnings-based bonuses in costvolume-profit analysis.
Author: J. Arnold
Cost volume profit analysis
Cost-volume-profit (CVP) analysis is a widely used tool for managerial planning.
CVP analysis examines relationships among product prices, levels of output,
variable costs, fixed costs, and target profits (or break-even points). A common
application of CVP analysis is the determination of the quantity of output needed to
earn a target profit or to break even.
The standard CVP model can be expressed as:
(1) (pq - vq - FC) (1 - t) = NI
where:
11
p = price per unit of the output
q = quantity of the output
v = unit variable cost of the
output
FC = total fixed costs
t = the company's average tax
rate
NI = net income
Equation (1) is merely an income statement put into algebraic form, where fixed
costs have been separated from variable costs.
To achieve the target after-tax profit, NI, the necessary output is:
(2) q = [FC + NI/ (1 - t)]/(p - v)
Equation (2), which is the algebraic solution of equation (1) for q, can be interpreted
as follows. The numerator of equation (2) indicates that the necessary volume of
output must cover the fixed costs as web as the desired earnings (adjusted to reflect
the anticipated provision for income taxes), while the denominator indicates the
amount that each unit of output contributes towards covering the numerator.
This article considers CVP analysis when earnings-based bonuses are to be
included as an expense in the above model. Because these bonuses are functions of
earnings, and are often not simple functions of earnings (as will be discussed later
when thresholds and upper limits are introduced), the necessary output (q) cannot
be obtained by merely inserting the bonus expense as part of FC or v. Another
complicating factor is that the amount of bonus will often depend on the level of
income tax expense, while at the same time, the amount of income tax expense
depends on the level of bonus (since bonuses are tax-deductible). This article
12
demonstrates how to do CVP analysis when earnings-based bonus expenses are
present.
PREVALENCE OF BONUSES
Many companies in most industries have bonus plans for executives. Bonuses may
take the form of cash or stock and many companies use both forms of bonus plans.
A recent survey of 649 companies in eight industry categories reports that the
percentage of companies having annual (cash) bonus plans ranged from 85% in the
insurance industry to 100% in the energy industry.
Cash bonuses are often a significant expense item. A recent study of 42 large
industrial companies revealed that these types of bonuses comprised 20% of
executive pay . The aforementioned study by reports that for CEOs, the median cash
bonus ranged from 32% of salary in the utilities industry to 64% of salary in the
energy industry. reports that a survey of 1,535 senior finance executives found chief
financial officers (CFOs) to receive bonuses averaging approximately 24% of their
salaries.
Bonuses are often based on accounting earnings . For instance, a Deloitte & Touché
study reported by Kissy reveals that "55% of the typical CFO's annual bonus
depends on company performance, defined most often as net income .
Article3: CVP analysis: a new look. (cost volume profit)
AUTHOR 3: JAMES O. CRAYCRAFT
Cost volume profit analysis
Cost Volume Profit analysis (CVP) is one of the most hallowed, and yet one of the
simplest, analytical tools in management accounting. In a general sense, it provides
a sweeping financial overview of the planning process ( Horngren et al, 1994). That
overview allows managers to examine the possible impacts of a wide range of
strategic decisions. Those decisions can include such crucial areas as pricing
policies, product mixes, market expansions or contractions, outsourcing contracts,
idle plant usage, discretionary expense planning, and a variety of other important
13
considerations in the planning process. Given the broad range of contexts in which
CVP can be used, the basic simplicity of CVP is quite remarkable. Armed with just
three inputs of data - sales price, variable cost per unit, and fixed costs - a
managerial analyst can evaluate the effects of decisions that potentially alter the
basic nature of a firm.
However, the simplicity of an analytical tool such as CVP can cut both ways. It can
be both its greatest virtue and its major shortcoming. The real world is complicated,
no less so in the world of managerial affairs; and a typical analytical model will
remove many of those complications in order to preserve a sharp focus. That
sharpening is usually achieved in two basic ways: simplifying assumptions are made
about the basic nature of the model and restrictions are imposed on the scope of the
model. Those simplifications and restrictions impinge on the reality and relevance of
analytical models, so attempts to improve them will involve releasing some of their
underlying assumptions or broadening their scope. In this article, we propose a
variation of the CVP analytical model by broadening its scope to include cost of
capital and the related impact of asset structure and risk level on strategic decisions,
while at the same time preserving most of its admirable simplicity.
Our variation of the conventional CVP model provides more useful information to
management because it focuses on more than operating expenses and sales
revenues. Financial managers have long recognized the importance of including cost
of capital and business risk variables in capital budgeting decisions (Brigham, 1995).
Our model not only incorporates these admittedly important variables but recognizes
the fixed and variable nature of capital costs.
Criticisms of CVP Analysis
Most criticisms of CVP relate to its basic underlying assumptions. Economists
(Machlup, 1952; Vickers, 1960) have been particularly critical of those assumptions.
Their criticisms take many forms, but they all arise from CVP's departures from the
standard supply and demand models in price theory economics. Perhaps the most
basic difference between CVP analysis and price theory models is that CVP ignores
the curvilinear nature of total revenue and total cost schedules. In effect, it assumes
14
that changes in volume have no effect on elasticity of demand or on the efficiency of
production factors. Managerial accountants recognize these economic critiques, but
they believe nonetheless that CVP analysis is a very useful initial analysis of
strategic decisions (Horngrenetal, 1994).
Additional criticisms of the underlying nature of CVP analysis arise from its
similarities to standard economic models, rather than its differences. Similar to
standard economic price theory models, basic CVP analysis usually assumes,
among other things, the following: single-stage, single-product manufacturing
processes; simple production functions with one causal variable; cost categories
limited to only variable or fixed; and data and production functions susceptible to
certainty predictions. Further, CVP analysis is typically restricted to one time period
in each case. The shortcomings of CVP seem daunting, but CVP is pliable enough to
overcome them all, if necessary and desirable. Nonlinear and stochastic CVP
models involving multistage, multi-product, multivariate, or multi-period frameworks
are all possible, although a single model embracing all of those extensions would
seem a radical departure from the whole point of CVP analysis, its basic
simplicity.(1) In general, the durability and popularity of CVP analysis undoubtedly
reflects the willingness of its users to "live with" the shortcomings revealed by
criticisms of its basic nature.
In this article, we are also content to "live with" the basic CVP model. Our concerns
lie elsewhere, namely, the somewhat restricted focus of CVP on only sales revenue
and operating expenses. That limitation can leave some very important aspects of
strategic decisions overlooked. Schneider (1992; 1994), for example, suggests that
the scope of CVP analysis ought to be widened to managerial compensation
schemes on target profit levels.
15
ARTICLE 4 :
AUTHOR : HELIOSTAT
http://w iki.answ e
0
WA
NotLgd
http://w w w .answ
COST VOLUME PROFIT ANALYSIS
Cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the volume
level at which total revenues are equal to total costs. When total costs and total revenues are
equal, the business organization is said to be "breaking even." The analysis is based on a set
of linear equations for a straight line and the separation of variable and fixed costs.
Total variable costs are considered to be those costs that vary as the production volume
changes. In a factory, production volume is considered to be the number of units produced,
but in a governmental organization with no assembly process, the units produced might refer,
for example, to the number of welfare cases processed.
There are a number of costs that vary or change, but if the variation is not due to volume
changes, it is not considered to be a variable cost. Examples of variable costs are direct
materials and direct labor. Total fixed costs do not vary as volume levels change within the
relevant range. Examples of fixed costs are straight and annual insurance charges. Total
variable costs can be viewed as a 45 line and total fixed costs as a straight line. In the breakeven chart shown in Figure 1, the upward slope of line represents the change in variable
costs. Variable costs sit on top of fixed costs, line DE. Point F represents the breakeven point.
This is where the total cost (costs below the line DFC) crosses and is equal to total revenues
All the lines in the chart are straight lines: Linearity is an underlying assumption of CVP
analysis. Although no one can be certain that costs are linear over the entire range of output
or production, this is an assumption of CVP. To the limitations of this assumption, it is also
assumed that the linear relationships hold only within the relevant range of production. The
relevant range is represented by the high and low output points that have been previously
reached with past production. CVP analysis is best viewed within the relevant range, that is,
within our previous actual experience. Outside of that range, costs may vary in manner. The
straight-line equation for total cost is:
Total cost = total fixed cost + total variable cost
Total variable cost is calculated by the cost of a unit, which remains constant on a per-unit
basis, by the number of units produced. Therefore the total cost equation could be expanded
as:
Total cost = total fixed cost + (variable cost per unit number of units)
Total fixed costs do not change.
A final version of the equation is:
Y = a + bx
16
where a is the fixed cost, b is the variable cost per unit, x is the level of activity, and Y is the
total cost. Assume that the fixed costs are $5,000, the volume of units produced is 1,000, and
the per-unit variable cost is $2. In that case the total cost would be computed as follows:
Y = $5,000 + ($2 1,000) Y = $7,000
It can be seen that it is important to separate variable and fixed costs. Another reason it is
important to separate these costs is because variable costs are used to determine the
contribution margin, and the contribution margin is used to determine the break-even point.
The contribution margin is the difference between the per-unit variable cost and the selling
price per unit. For example, if the per-unit variable cost is $15 and selling price per unit is
$20, then the contribution margin is equal to $5. The contribution margin may provide a $5
contribution toward the reduction of fixed costs or a $5 contribution to profits. If the business
is operating at a volume above the break-even point volume (above point F), then the $5 is a
contribution (on a per-unit basis) to additional profits. If the business is operating at a volume
below the break-even point (below point F), then the $5 provides for a reduction in fixed
costs and continues to do so until the break-even point is passed.
Once the contribution margin is determined, it can be used to calculate the break-even point
in volume of units or in total sales dollars. When a per-unit contribution margin occurs below
a firm's break-even point, it is a contribution to the reduction of fixed costs. Therefore, it is
logical to divide fixed costs by the contribution margin to determine how many units must be
produced to reach the break-even point: Assume that the contribution margin is the same as
in the previous example, $5. In this example, assume that the total fixed costs are in creased
to $8,000. Using the equation, we determine that the break-even point in units:
In Figure 1, the break-even point is shown as a vertical line from the x-axis to point F. Now,
if we want to determine the break-even point in total sales dollars (total revenue), we could
multiply 1600 units by the assumed selling price of $20 and arrive at $32,000. Or we could
use another equation to compute the break-even point in total sales directly. In that case, we
would first have to compute the contribution margin ratio. This ratio is determined by
dividing the contribution margin by selling price. Referring to our example, the calculation of
the ratio involves two steps:
Going back to the break-even equation and replacing the per-unit contribution margin with
the contribution margin ratio results in the following formula and calculation:
Figure 1 shows this break-even point, at $32,000 in sales, as a horizontal line from point F to
the y-axis. Total sales at the break-even point are illustrated on the y-axis and total units on
the x-axis. Also notice that the losses are represented by triangle and profits in the triangle.
The financial information required for CVP analysis is for internal use and is usually
available only to managers inside the firm; information about variable and fixed costs is not
available to the general public. CVP analysis is good as a general guide for one product
within the relevant range. If the company has more than one product, then the contribution
margins from all products must be averaged together. But, any cost-averaging process
reduces the level of accuracy as compared to working with cost data from a single product.
Furthermore, some organizations, such as nonprofit organizations, do not a significant level
of variable costs. In these cases, standard CVP assumptions can lead to misleading results and
decisions.
17
ARTICLE 5
AUTHOR: G SMITH
COST-VOLUME-PROFIT ANALYSIS
Cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the volume
level at which total revenues are equal to total costs. When total costs and total revenues are
equal, the business organization is said to be breaking even. The analysis is based on a set of
linear equations for a straight line and the separation of variable and fixed costs.
All the lines in the chart are straight lines: linearity is an underlying assumption of CVP
analysis. Although no one can be certain that costs are linear over the entire range of output
or production, this is an assumption of CVP. To help alleviate the limitations of this
assumption, it is also assumed that the linear relationships hold only within the relevant range
of production. The relevant range is represented by the high and low output points that have
been previously reached with past production. CVP analysis is best viewed within the
relevant range, that is, within our previous actual experience. Outside of that range, costs may
vary in a nonlinear manner. The straight-line equation for total cost is: Total cost = total fixed
cost total variable cost
In this equation, a is the fixed cost, b is the variable cost per unit, x is the level of activity,
and Y is the total cost. Assume that the fixed costs are $5,000, the volume of units produced
is 1,000, and the per-unit variable cost is $2. In that case the total cost would be computed as
follows: Y = $5,000 ($2 × 1,000) Y = $7,000
Contribution margin
It can be seen that it is important to separate variable and fixed costs. Another reason it is
important to separate these costs is because variable costs are used to determine the
contribution margin, and the contribution margin is used to determine the break-even point.
The contribution margin is the difference between the per-unit variable cost and the selling
price per unit. For example, if the per-unit variable cost is $15 and selling price per unit is
$20, then the contribution margin is equal to $5. The contribution margin may provide a $5
contribution toward the reduction of fixed costs or a $5 contribution to profits. If the business
is operating at a volume above the break-even point volume (above point F), then the $5 is a
contribution (on a per-unit basis) to additional profits. If the business is operating at a volume
below the break-even point
18
Break-even point
The $5 provides for a reduction in fixed costs and continues to do so until the break-even
point is passed.
Once the contribution margin is determined, it can be used to calculate the break-even point
in volume of units or in total sales dollars. When a per-unit contribution margin occurs below
a firm's break-even point, it is a contribution to the reduction of fixed costs. Therefore, it is
logical to divide fixed costs by the contribution margin to determine how many units must be
produced to reach the break-even point:
Assume that the contribution margin is the same as in the previous example, $5. In this
example, assume that the total fixed costs are increased to $8,000. Using the equation, we
determine that the break-even point in units:
Going back to the break-even equation and replacing the per-unit contribution margin with
the contribution margin ratio results in the following formula and calculation:
shows this break-even point, at $32,000 in sales, as a horizontal line from point F to the yaxis. Total sales at the break-even point are illustrated on the y-axis and total units on the xaxis. Also notice that the losses are represented by the DFA triangle and profits in the FBC
triangle.
The financial information required for CVP analysis is for internal use and is usually
available only to managers inside the firm; information about variable and fixed costs is not
available to the general public. CVP analysis is good as a general guide for one product
within the relevant range. If the company has more than one product, then the contribution
margins from all products must be averaged together. But, any cost-averaging process
reduces the level of accuracy as compared to working with cost data from a single product.
Furthermore, some organizations, such as nonprofit organizations, do not incur a significant
level of variable costs. In these cases, standard CVP assumptions can lead to misleading
results and decisions.
19
ANALYSIS OF LITERATURE REVIEW
Cost-volume-profit (CVP) analysis expands the use of information
provided by breakeven analysis. A critical part of CVP analysis is the
point where total revenues equal total costs (both fixed and variable
costs). At this breakeven point (BEP), a company will experience no
income or loss. This BEP can be an initial examination that precedes
more detailed CVP analysis.
Cost-volume-profit analysis employs the same basic assumptions as
in breakeven analysis. The assumptions underlying CVP analysis are:
The behavior of both costs and revenues is linear throughout the
relevant range of activity. (This assumption precludes the concept of
volume discounts on either purchased materials or sales.) Costs can be
classified accurately as either fixed or variable. Changes in activity
are the only factors that affect costs. All units produced are sold (there
is no ending finished goods inventory). When a company sells more
than one type of product, the sales mix (the ratio of each product to
total sales) will remain constant.
The components of Cost-Volume-Profit Analysis are:
 Level or volume of activity
 Unit Selling Prices
 Variable cost per unit
 Total fixed costs
 Sales mix
20
Findings of study
Running a successful small business requires adept navigation of the man choices created by
an ever changing market place. Cost Volume Profit Analysis (CVPA) is an effective tool that
can help its user answer important questions such as "what price should I charge for this
product or that service?", "which of my products or services is most profitable?", and "what is
the best operating leverage level for my business given current market conditions?" Costvolume-profit analysis (CVP), or break-even analysis, is used to compute the volume level at
which total revenues are equal to total costs. When total costs and total revenues are equal,
the business organization is said to be "breaking even." The analysis is based on a set of
linear equations for a straight line and the separation of variable and fixed costs. ). All the
lines in the chart are straight lines: linearity is an underlying assumption of CVP analysis.
Although no one can be certain that costs are linear over the entire range of output or
production, this is an assumption of CVP. To help alleviate the limitations of this assumption,
it is also assumed that the linear relationships hold only within the relevant range of
production. The relevant range is represented by the high and low output points that have
been previously reached with past production. CVP analysis is best viewed within the
relevant range, that is, within our previous actual experience. Outside of that range, costs may
vary in a nonlinear manner. The straight-line equation for total cost is: Total cost = total fixed
cost total variable cost
Understanding variable &fixed expense.
How to calculate contribution margin.
Understanding the break even sales & unit calculation.
Understanding the target profit analysis The straight-line equation for total cost is:
Total cost = total fixed cost total variable cost & calculation.
New look of cost volume profit analysis.
21
SWOT Analysis of cost volume profit
S=strength






Easily identified amount of quantity.
Actual cost of the product.
Calculate the break even sales.
Calculate the break even unit.
To identify the target profit.
To identify the actual cost quantity.
Weakness
 The CVP approach to analysis is beneficial, but it is limited in the amount of
information it can provide in a multi-product operation.
 Much of the analysis that is done by business managers who use this approach is
done based on a single product.
 This makes the challenge of CVP analysis all the more difficult because it must be
done for each specific product.
Opportunity
 CVP analysis is based on specific data and requires tremendous attention to detail,
the best that it can do is provide approximate answers to questions, rather than ones
that are exact.
 It answers hypothetical questions better than it provides actual answers for solving
problems.
 It leaves the business manager to decide how to act on the CVP analysis data he has
at hand.
 the manager has to exercise extreme caution when making decisions about changes
to business operations and finance.
 Judgments have to be made after careful investigation and deliberation -- and not just
be based solely on statistics.
 Investigation may involve, for instance, interviewing employees and carefully
observing their daily activities, as opposed to simply treating them as part of a
statistical model.
Threats
 The behavior of both costs and revenues is linear throughout the relevant
range of activity. (This assumption precludes the concept of volume discounts
on either purchased materials or sales.
 Costs can be classified accurately as either fixed or variable.
 Changes in activity are the only factors that affect costs.

All units produced are sold (there is no ending finished goods inventory).
22

When a company sells more than one type of product, the sales mix (the ratio
of each product to total sales) will remain constant.
Components of cost volume analysis





Level or volume of activity
Unit selling prices
Variable cost per unit
Total fixed costs
Sales mix
Conclusion & Recommendation
Clearly, the use of CVP analysis has value not only in the manufacturing sector, but also for
those entities such as banks which operate in the financial services sector. The idea that
strategic planning in a bank would be well served by using the concept of breakeven should
be embraced by bank planners. The analysis presented in this study represents one tool that is
likely to prove useful in assessing and managing the risks and opportunities inherent in the
financial services sector.
23
Reference & Bibliography
AUTHOR : JAY HICKMAN
Jay has worked with two large consulting firms, Arthur Andersen, LLC and Protiviti helping
his clients comply with Generally Accepted Accouting Principles and improving their
business processes and procedures. He has also worked as an independent consultant for
several Fortune 500 companies helping them develop and improve internal controls and
procedures related to financial reporting. Jay's experience extends over a decade, and he
holds a BA in accounting and an MBA from the University of Utah. Jay's firm, Advantage
Business Solutions, LLC specializes in helping small business owners run their businesses
more effectively and efficiently by partnering with owners to improve business processes and
procedures.
AUTHOR : HELIOSTAT
Author Heliostst was born in Michigan in 1960. He grew up California in USA. His
University is California state university. At present he is a Professor of Stanford university.
He wrote many books of managerial accounting. Her books very popular in America. He
married 1983 . Heliostat have a 3 child . Heliostat is a very happy for her family.
AUTHOR : GERRIT SMITH
Author Smith was born in Freetown, Sierra Leone in 1955. He grew up California in
USA. His University is California state university. At present he is a Professor of
Stanford university. He writes of many books of managerial accounting. Her books
very popular in America. He married 1983 . Smith have a 3 child . Smith is a very
happy for her family.
.
Author: J. Arnold
How to include earnings-based bonuses in cost-volume-profit analysis
He writes of many books of managerial accounting. Her books very popular in
America.
AUTHOR
)
JAMES O. CRAYCRAFT
CVP analysis: a new look. (Cost volume profit)
He has also worked as an independent consultant for several Fortune 500 companies helping
them develop and improve internal controls and procedures related to financial reporting.
Jay's experience extends over a decade, and he holds a BA in accounting and an MBA from
the University of Utah. Jay's firm, Advantage Business Solution.
24
Appendix
www.gogele.com
Principles of accounting- kimmels ,kisso
Principles of accounting –volume 2
25