...Lecture 5: Cost-Volume-Profit Analysis In this module, we are going to discuss a simple concept yet a powerful financial planning and decision-making tool for managers. This concept is called CVP analysis or cost volume profit relationship. Profits are the difference between revenues and costs. Both revenue and cost depend on the volume of operations. So, in the short run whether you make a profit or a loss depends upon the volume of sales you make. What is the unknown for a manager when he or she tries to project profits for future? The managers know the costs and the selling price. So the only unknown is the volume of sales. The importance of CVP analysis flows from the fact that it emphasizes the inter-relationship between costs, volume of sales, and selling price, and therefore it represents a unified picture of all financial information in a simple framework. What effect on profit can American Airlines expect when it adds a new flight on the Dallas Chicago route? How many patient days of care must Dallas Children’s hospital provide in order to cover all of its operating costs? How will the profits for Texas Instruments change if it sells 10% more of its DLP chips? Each of the above questions concerns the effect on cost and revenues when an organization’s activity changes. CVP analysis summarizes the effects of changes in organization’s volume of activities on its costs, revenue and therefore profit. Although the word profit appears in CVP analysis, this...
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...of Petroşani, Economics, 9(3), 2009, 103-106 103 USING COST-VOLUME-PROFIT ANALYSIS IN DECISION MAKING GABRIELA BUŞAN, IONELA-CLAUDIA DINA * ABSTRACT: The cost-volume-profit study the manner how evolve the total revenues, the total costs and operating profit, as changes occur in volume production, sale price, the unit variable cost and / or fixed costs of a product. Managers use this analysis to answer different questions like: How will incomes and costs be affected if we still sell 1.000 units? But if you expand or reduce selling prices? If we expand our business in foreign markets? KEY WORDS: cost-volume-profit, marginal contribution, break-even, the equation method, the marginal contribution method, graphical method The cost-volume-profit is a necessary tool for forecasting also for management control. The method includes a number of techniques and methods of solving problems based on understanding patterns of evolution characteristics of business costs. The techniques express the relationship between incomes, sales structure, costs, production volume and profits and include break-even analysis and profit forecasting processes. This relationship provides a general model of economic activity, which management can use to short-term forecasts for business performance evaluation and analysis of decision alternatives. The marginal contribution is the difference between total revenue and totals variable costs and explains how changes the operating profit as changing the...
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...Cost-Volume Profit Analysis Cost-Volume-Profit (“CVP”) analysis is essential for any company to be able to determine break-even points, and determining short term decisions. Arguably, for small businesses, nothing could be more important, as CVP provides the minimum volume of a product needed to sell in order to experience neither a gain nor loss. For entrepreneurs it is important to be effective and efficient when utilizing CVP accounting processes. This provides the framework for analyzing CVP’s importance to entrepreneurs. Defined, cost-volume-profit analysis is “the study of the effects of changes in cost and volume on profits” (Kimmel, 2011). CVP is critical in profit planning, determining selling prices, and helps determine the minimum number of future sales. Underling CVP are the assumptions that both cost and revenues are linear, costs can be classified as either fixed or variable, and one changes in activity or volume affect costs (Kimmel, 2011). CVP helps entrepreneur’s asses how much contribution is made on each product and how many units to sell in order to cover fixed costs. “[CVP] can [also] be used to determine whether efforts would be better directed toward the reduction of fixed costs or of variable costs” (Crowningshield, 1986). Margin of Safety as it relates to cost-volume-profit measures the difference between actual sales and the break-even point. Margin of safety enables management to determine allowable sales risk when introducing...
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...or relationship between cost, volume and profit in an organization mainly by focusing on interaction between elements such as a: Product Price b: Level or volume of activity c: Per unit variable cost d: Total fixed costs e: Mix of products sold. Assumptions: The cost volume profit analysis assumptions suggest that the selling price does not change and remains constant as the volume changes. As costs are liner as a result of which they can be accurately divided into variable and fixed element. The fixed element remains constant in total over the relevant range and the variable element is constant per unit. On the other hand when considering multi-product companies, the sales mix is constant. Limitations of CVP Analysis It is limited in the amount of information it can provide in a multi-product operations. Multi-product businesses, such as restaurants, can have a difficult time with CVP analysis because menu items, for instance, are likely to have many variable cost ratios. This makes the challenge of CVP analysis all the more difficult because it must be done for each specific product. As it is a short run, marginal analysis therefore it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between variable and fixed costs but in the long run all costs are variable. Actual future volumes, revenues, and costs are unknown. The analysis...
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...respect of both factories : Selling price per unit Variable cost per unit Fixed cost Depreciation included in above Sales (Units) Capacity (Units) You are required to determine : * Output Break-even-points for each factory. * Capacity Break-even-point for each factory. * Cash Break-even-point for each factory, * Which factory is more profitable ? * B.E.P. for company as whole assuming the present product-mix. * B .E.P. for company assuming that product-mix can be changed as desired. 2. There are two similar plants under the same management. The management wishes to merge these two plants and to run them as one integrated plant. The following particulars are made available : Plant-I Plant-II Capacity in operation 60% 100% Rs. Rs. Sales 1,20,000 3,00,000 Variable Costs 90,000 2,20,000 Fixed Costs 25,000 40,000 You are requested to compute : (i) What would be the capacity of merged plant to be operated at break-even ? (ii)What would be the profitability on working at 75% of the integrated capacity ? 3. 1st Year 2nd Year Sales Rs. 3,60,000 Decrease in sales price and decrease Margin of Safety 25% in fixed costs are the only changes Profit volume Ratio 30% Margin of safety 30% Profit volume Ratio 25% Required : * Decrease of sales amount in IInd year. * Decrease of fixed cost in IInd year. * New profit in IInd year. * New BEP in...
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...mainly concerned with the preparation of internal financial information to be used by the managers to run the business more effectively. This information can be used in decision making, planning, and control. Management accounting is dealt with in another module of your course. Management Accounting is an integral part of management activity concerned with identifying, presenting and interpreting information used for the following: • Formulating strategy • Planning and controlling activities • Decision making • Optimising the uses of resources Key Definitions a) Cost unit- the cost of an item a product or service. This could be a single item, a batch, a contract what ever is appropriate for the organisation. b) Cost classification - to group costs for analysis and control purposes c) Cost centre - a function or location for which costs are ascertained dividing into production (primary) and service (secondary) areas. 1. THE...
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...ACC501 Cost Accounting.txt Cost Accounting or Cost-Volume-Profit Accounting ACC501 - Accounting for Decision Making Module 2 - Case Abstract This paper contains a brief overview of the current primary accounting standard GAAP but also explores CostVolume-Profit analysis and Cost Accounting. In the 1980s accountants and financial managers embraced technology and became the basis for the Personal Computer’s (PC) explosive expansion. The abilities of the computer coupled with the needs of business management supported the development of many new accounting tools and processes. There is universally true method of accounting. The accounting method(s) used in an organization must be acceptable to an internal or external auditing group and flexible so that management can maximize the resources available to the company. With our modern high-speed data processing systems we have the luxury of being able to look at our data in different ways. The “Generally Accepted Accounting Principles” (GAAP) has been the accounting method of choice when preparing statements for viewing by third parties, including both investors and government regulators. This is not to say that the information generated for GAAP accounting statements is not valuable to the leadership of a corporation. Rather, there are additional styles or accounting types that may be more valuable internally, allowing the managers and their Page 1 ACC501 Cost Accounting.txt staff to maximize utilization of their...
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...TABLE OF CONTENT Executive summary……….………………………………………………………2 Background…………………………………………………………………3 Analysis of company situation………………………………………………....4-8 Analysis on market situation...............…………………………………….....9-12 Swot and competitor analysis ………………………………………………12-15 New product for McDonalds………………………………………………...15- 19 Future marketing strategy..................................................................................19-21 Financial forecast............................................................................................21-22 Conclusion……………………………………………………………......22 Appendix …………………………………………………………..........23-24 References…………………………………………………………….....25 INTRODUCTION Health care system is critically important around the world. And health care industry has always been a subject area with a strong international dimension. The health-care industry incorporates several sectors that are dedicated to providing health care services and products. According to industry and market classifications the health-care industry includes health care equipment and services as well as pharmaceuticals, biotechnology and life sciences, nursing homes, providers of health care plans and home health...
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...Cost-Volume-Profit (CVP) Analysis Shanica N. Todd-Higgins ACC/561 - ACCOUNTING Instructor: DAVID DUREN Schedule: 06/29/2015 - 08/03/2015 Campus: COLUMBIA SOUTH CAROLINA CAMPUS Group ID: SCMBA0914 CVP - What If Analysis Through research, according to Diane Wicks (2015), “Cost-volume-profit (CVP) analysis is used to assess the impact of potential changes in costs and volume on a company's operating profit and net profit. CVP analysis is also useful in making decisions regarding pricing of products, selection of product lines and utilization of production equipments. Additionally, CVP is at the heart of methods used for calculating the break-even point and sales levels necessary to attain targeted income levels.” The break-even point according to W.D Adkins (2015) is, “the point at which revenues are just enough to cover expenses so there in no profit and no loss.” For instance Calculating Breaking-Even Analysis There are many steps in finding the break even analysis. According to Zari Ballard of Ehow (2015, ), First, calculate the total fixed costs by adding together each of the company's fixed costs. For example, a small company with annual fixed costs of $7,000 in rental payments, $3,000 in equipment leases and $30,000 in administrative salaries would have TFC of $40,000. Next, calculate the contribution margin per unit by subtracting the variable cost per unit from the sales price per unit. For example, if a small company's product sells for $60 per unit with...
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...Assignment: Cost, Volume, and Profit Formulas ACC220 February 19, 2012 Assignment: Cost, Volume, and Profit Formulas In a business, it is profit that ultimately determines whether a business succeeds or fails a financial year. To aid in forming decisions, managers depend on information presented in Cost-Volume-Profit (CVP) analysis. In a CVP analysis, information is built on the interrelation of five general components. By understanding these components and how they relate to one-another, managers and accountants can also determine the contribution margin ratio. With these factors in hand, managers can predict the contribution ratios necessary to balance expenses and maximize profits. For managers to make successful decisions in business, they need to understand the components, the factors, and how they relate to one-another. Creating a CVP analysis requires knowledge of five general components: The volume of a business’ activities, the selling prices of individual units, the variable and fixed costs of producing each unit, and the net total of multiple types of units sold. The volume of business’ activities generally refers to the total units of any specific merchandise sold, which is multiplied with selling prices. Following the income of sales, the variable costs (costs to produce each unit) is subtracted to determine the contribution margin. Finally, the fixed costs (supporting budget) are subtracted from the contributions margin to determine the net income in a CVP...
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...CHAPTER 7: COST-VOLUME-PROFIT ANALYSIS QUESTIONS 7-1 The underlying relationship in cost-volume-profit analysis is that costs, revenues, and profits all change in a predictable way as the volume of activity changes. 7-2 It is more practical to find the breakeven point in sales dollars for companies having thousands of individual items. Finding the breakeven point for each item would be laborious and meaningless. 7-3 The contribution margin ratio is: price - variable costs price The contribution margin ratio (CMR) represents the net contribution per sales dollar. The CMR tells us the change in profit associated with a given change in sales dollars. It is a useful measure of the relative contribution to profit of different products, divisions, or sales units. The use of this ratio can give a retail store a good approximation of the sales dollars necessary for the store to break even. A higher CMR is associated with higher risk. A higher CMR can have a more favorable impact on profit. However, if sales fall below breakeven, then a high CMR will yield a relatively more negative impact on profits. 7-4 The basic assumption of the CVP model is that the behavior of revenues and total costs is assumed to be linear over the relevant range of activity. Managers must be careful to remember that the calculations done within the context of a given CVP model cannot be interpreted safely outside of the relevant range of output for that particular...
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...Chapter 9 Profit Planning: Cost-Volume-Profit Analysis Cases |9-1 |Cost-Volume-Profit Analysis and Strategy | |9-2 |Cost-Volume-Profit Analysis and Cost Estimation | |9-3 |Cost-Volume-Profit Analysis and Strategy | |9-4 |Cost-Volume-Profit Analysis and Strategy: The ALLTEL Pavilion | |9-5 |Sensitivity Analysis; Regression Analysis | |9-6 |Profit Planning: Choice of Cost Structure | |9-7 |Pancake World | Readings 9-1: “Tools for Dealing with Uncertainty” by David R. Fordham, CMA, CPA, Ph.D and S. Brooks Marshall, CFA. DBA This article explains how to use simulation methods within a spreadsheet program such as Excel to perform sensitivity analysis for a given decision context. The available spreadsheet simulation software systems include the programs Crystal Ball and @Risk, among others. These software systems allow the user to analyze the effect of uncertainty on the potential outcomes of a decision. These tools can be applied directly to CVP analysis. The tools allow...
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..."USEFULNESS OF COST VOLUME PROFIT ANALYISI AS AMANGERIAL Concept" By samya Alakhdar , Dr . Moade Shubita , NYIT –AMMAN –JORDAN FALL-2011. Key words :managerial accounting , cost accounting , CVP. o "USEFULNESS OF COST VOLUME PROFIT ANALYISI AS AMANGERIAL CONCEPT" 1 DR.MOADE SHUBITA "USEFULNESS OF COST VOLUME PROFIT ANALYISI AS AMANGERIAL Concept" By samya Alakhdar , Dr . Moade Shubita , NYIT –AMMAN –JORDAN FALL-2011. Key words :managerial accounting , cost accounting , CVP. TOPICS TO COVER: ABSTRACT INTRODUCTION PROBLEM ASSUMPTION UNDERLYING CVP ANALYSISI THE CONTRIBUTION MARGIN. CONTRIBUTION MARGIN INCOME STATEMENT DEFINE THE BREAKEVEN POINT WHAT IS THE C.M RATIO. THE IMPORTANCE of UNIT CONTRIBUTION MARGINE DETERMINATI SOME APPLICATIONS OF CM “WHAT IF “ANALYSIS ON OF TARGET INCOME AND TAXES MOS- MARGINE OF SAFETY CHOOSING THE COST STRUCTURE TO DECREASE COST ULTIMATELY DEGREE OF OPERATING LEVERAGE DEGREE OF OPERATING LEVERAGE IMPORTANCE FOR MANAGERS SALES MIX . CASE TO STUDY. LIMITATION OF CVP CONCLOUSION REFERENCES 2 DR.MOADE SHUBITA "USEFULNESS OF COST VOLUME PROFIT ANALYISI AS AMANGERIAL Concept" By samya Alakhdar , Dr . Moade Shubita , NYIT –AMMAN –JORDAN FALL-2011. Key words :managerial accounting , cost accounting , CVP. ABSTRACT: In order to cope with many planning decisions managers use cost volume profit analysis , They find it an extremely useful measurement in a variety of ways . The present...
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...A presentation report on Cost–volume–profit analysis (CVP) Prepared for: Ms. Wahida Akther Lecturer Department of Business Administration Course code: ACC- 324 Course title: Taxation Prepared by: Group name: Exclusive NAME | ID | Omar Faruk | 1001010169 | Mirza Atiqul Hoque | 1001010182 | Minhaj Sultana | 1001010184 | Mushfiqur Rahman | 1001010186 | khairul Anam Choudhury | 1001010199 | Section:(D) 8th semester 24th Batch Department of Business Administration, Leading University,Syhet. Date of Submission: August 07 ,2012 Introduction: The relationship between cost volume and profit is shown by cost-volume-profit analysis. It is an analytical tool for analyzing the relationship among cost, price, profit, sales and production volume. Mainly there are three elements in cost-volume-profit analysis. It is highly essential for the management to have the complete knowledge about the inter relationship among the cost, volume and profit. For this purpose cost-volume-profit analysis can be regarded as a sophisticated method or analytical tool used in management. Definition of 'Cost-Volume Profit Analysis': Cost-volume profit analysis is a simplified model, useful for elementary instruction and for short-run decisions. It is based upon determining the breakeven point of cost and volume of goods. It can be useful for managers making short-term economic decisions, and also for general...
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...INCOME STATEMENT | FOR THE YEAR ENDED DECEMBER 31, 2013 | | | | SALES | | $16,000,000 | MANUFACTURING COSTS: | | | VARIABLE | $7,200,000 | | FIXED | ------------------------------------------------- 2,340,000 | ------------------------------------------------- 9,540,000 | GROSS MARGIN | | 6,460,000 | SELLING & ADMIN COSTS: | | | COMMISSION TO AGENTS | 2,400,000 | | FIXED MARKETING COSTS | 120,000* | | FIXED ADMIN COSTS | ------------------------------------------------- 1,800,000 | ------------------------------------------------- 4,320,000 | NET OPERATING INCOME | | 2,140,000 | | | | *All depreciation on storage facilities. As Karen handed the statement to Mitt Romney, Pittman’s president, she commented, “ I used the agents’ 15% commission rate in completing the statement. But we’ve just learned that the agents refuse to handle selling our product next year unless we increase the commission rate to 20%." Mitt replied “How can they possibly defend a 20% commission rate? And I say it’s time we fire those guys and get our own sales force.” Karen said “We can hire our own sales staff and pay them 7.5% commission, along with a small salary. Of course, we would have to handle all promotion costs too. We figure our fixed costs would increase by $2,500,000 per year.” The breakdown of the $2,500,000 cost figure is as...
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