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CVP Analysis

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Safalta Singh
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23 views8 pages

CVP Analysis

Uploaded by

Safalta Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Costing Concepts and Techniques

Cost Accounting Objectives:


Cost Identification
Cost Analysis
Cost planning
Cost control
Benefits of cost accounting
Cost consciousness
Cost planning and control
Cost records for decision making
Pricing of products
Performance appraisal
Profit planning
Cost Types
Direct and indirect cost
Fixed and variable cost
Engineering and Discretionary cost
Opportunity cost
Operating cost and financial cost
Cost Volume Profit Analysis
Meaning:
CVP Analysis is a technique for profit planning.
Benefits:
1. Under CVP analysis, C is cost which is analyzed on the
basis of FC, VC and TC which gives a better idea of
business operation and profit planning.
2. In CVP analysis V stands for Volume which means
production and sales volume. It is analyzed with respect to
cost and profits. This technique is also known as break
even analysis.
3. Profits are analyzed from the view point of short run
ignoring fixed cost and contribution (sales less variable
cost) is assumed to be the profit. This approach helps the
manager to make a better business planning.
Important formulas
1. With the help of the following information find out break even sales:
Particulars Amount (Rs)
Sales 10,000
Variable cost 6,000
Fixed cost 3,000

Solution:
Break-even-point (in sales rupees) = fixed cost/PV ratio
Fixed Cost = ₹ 3,000
PV ratio= contribution/sales
= sales less variable cost/sales
= 10,000 – 6,000/10,000
=4,000/10,000
= 2/5
=Break even sales = 3,000x5/2
= ₹ 7,500
2. Following information has been taken from the accounts of a
manufacturing company:
Actual Sales, 15,000 units @₹ 15 per unit

Particulars Fixed Cost Variable Cost Total Cost


Material -- 48000 48000
Labor -- 58000 58000
factory overheads 25000 16000 41000
Administrative overheads 8000 6000 14000
Selling & Administrative
overheads 7000 22000 29000
Total 40000 150000 190000

From the above information, you are required to calculate:


1. Profit volume (PV) ratio
2. Break-even point (BEP)
3. Margin of Safety
Solution:
a) PV ratio = contribution/sales
= 15-10/15 = 1/3
(As 15 per unit is the Selling Price and 1,50,000
/15000= Rs 10 per unit is VC)
b) Break-even-point= FC/PV ratio
= 40,000x3
= ₹ 1,20,000
c) Margin of Safety = Actual Sales - Break even
sales
=15x15000- 1,20,000
= 2,25,000 – 1,20,000 = ₹ 1,05,000
3. Two firms X Limited and Y Limited, sell identical products
in the same market. Their budgeted profit and loss accounts for
the year ending 30th June 2017 are as follows:

Particulars X Limited Y Limited


sales (₹) 400,000 400,000
Less variable cost -320,000 -280,000
less fixed cost -40,000 -80,000
Net Profit 40,000 40,000
You are required to answer the following questions:
1. Calculate the break-even point for the two firms.
2. Calculate the sales volume at which each business will
earn a profit of ₹ 50,000.
3. State the likely effect on the profits of the firm if:
a) Demand for the product is increasing.
b) Demand for the product is falling.
Solution:
1. Calculation of Break Even Points of X Limited and Y Limited
Particulars X Limited Y Limited
sales (₹) 400,000 400,000
Less variable cost -320,000 -280,000
contribution 80,000 120,000
less fixed cost -40,000 -80,000

P/V Ratio= contribution/PV ratio 80000/400000= 0.20 or 20% 120000/400000= 0.30 or 30%
Break even point=Fixed cost/PV ratio= 40,000/.20 = ₹ 2,00,000 80,000/.30= ₹ 2,66,667

2 . Sales volume at which each firm earns ₹ 50,000


For X Limited:

= ₹ 4,50,000
For Y Limited:
= ₹ 4,33,333
3. Impact on profit:
a) If the demand for the product is increasing its impact on the profit of Y Limited
will be more positive as the p/v ratio of Y Limited is 30% as compared to the
profit of X Limited whose PV ratio is 20%.
b) If the demand for the product is falling then Y Limited would be more severely
affected as PV Ratio and breakeven point of Y Ltd both are higher as compared to
the X Limited.

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