...CVP analysis: A tool for business decision making 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...
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...CHAPTER FIVE 5. INTRODUCTION TO COST VOLUME PROFIT (CVP) ANALYSIS Upon a successful completion of this chapter, you should be able to: ← distinguish between contribution margin and gross margin ← prepare and interpret a contribution income statement ← compute a break even point in total birrs and total units using the contribution margin approach and the equation approach ← Prepare a cost-volume –profit graph, and explain how it is used. ← Applying CVP analysis to determine the effect on profit of changes in fixed expenses, variable expenses, sales prices, and sales volume. ← Explain the role of cost structure and operating leverage in CVP analysis. ← List and discuss the key assumption of CVP analysis. ← compute the break even point and prepare a profit-volume graph for multiproduct enterprise ← explain the effects of sales mix on profit ← calculate sales volume in total birrs and total units to reach a target profit 1. INTRODUCTION Cost-volume-profit (CVP) analysis is one of the most powerful tool that help managers as they make decisions by facilitating quick estimation of net income at different levels of activity. In other words, it helps them to understand the interrelationship between cost, volume, and profit in an organization by focusing on interactions between the following five elements:...
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...CVP ANALYSIS When we consider about an accounting, there two kinds of accounting practices in business environment which are known as financial accounting and managerial accounting. The financial accounting specially prepared for external users such as shareholders, creditors, investors and government authorities. The managerial accounting is consider and focus on internal operations and it is being used by managers to prepare budgets, evaluate operation performances and pre-organized to face for new trends in the business environment. The cost-volume-profit analysis does vital role in managerial accounting as the CVP analysis can be used both products and services, and answers various questions pertaining to profitability of the company products or services. Its deals with three elements. The first factors is cost which incurred to make product or services, the second factors is volume which focus on number of units of product sold in a specific period of time The third factors is profit which basically selling price minus cost (materials, labor, overhead etc.). As a new business entrepreneur, cost-volume-profit analysis will help to determine and forecast important business factors as discuss below. The CVP analysis is very crucial tool for business entrepreneurs and managers as it can analyses a single product, a group of products with fixed cost or with a variable cost. Finally, it can evaluate the entire business as a whole. Though, it provides many advantages to...
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...TABLE OF CONTENT SR.NO | DETAILS | PAGE NO. | 1 | EXECUTIVE SUMMARY | 2 | 2 | INTRODUCTION TO COMPANY | 3 | 4 | CONTRIBUTION TOWARDS AGRICULTURE | 4 | 5 | CVP ANALYSIS | 5 | 6 | CONTRIBUTION INCOME STATEMENT | 8 | 7 | CONTRIBUTION INCOME RATIO | 9 | 8 | BREAKEVEN POINT | 10 | 9 | MARGIN OF SAFETY | 11 | 11 | BIBLIOGRAPHY | 12 | EXECUTIVE SUMMARY This report examines the CVP analysis on ENGRO Fertilizer Company limited which is registered under SECP rule in stock exchange as a public company. For CVP analysis contribution income statement is made. Besides this, total fixed cost, total variable cost, contribution, contribution margin, contribution margin ratio, breakeven point of sales and margin of safety is computed form the data which is gathered from annual report of the company year 2013. Considering the importance of the agriculture sector in Pakistan, contributing up to 24% in GDP growth (Pakistan bureau of statistics), and fertilizer industry becomes an integral part in crop cultivation and ultimately excising the agriculture sector. The Fertilizer industry in Pakistan has not been able to get its due share in long term government policies. The private sector has come up with huge investment and its present infrastructure not only ensures sufficient cheap and good quality Fertilizer for domestic use but has the potential to earn foreign exchange. I made...
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...such as labor, raw material, manufacturing, advertisement, distribution and miscellaneous and will help them to stay in with their budgets, incase if they are over the budget it will help managers to make an educative decision on where to cut the cost and tally the budget. The expenses can be classified into two parts fixed cost and other as variable cost. Managers need the skills to identify them and manage them. Cost-Volume-Profit analysis, CVP analysis, helps in understanding the relationship of these two costs, volume of product sales required to cover manufacturing or servicing cost, and net profit. CVP analysis is used in managerial accounting to use the relationships between cost, volume and profit quickly to calculate metrics that provide insight into the current and future performance of a business. Small-business owners can find CVP analysis useful, as it is mathematically simple, but it provides information that would otherwise require the production of an entire budgeted income statement (Freedman, 2013). Companies often use CVP analysis to regulate the level of sales needed to make a specific profit. This is especially common as small-business owners determine if the...
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...selling and increase another product sales volume by 30%? The analytical technique that will answer these questions is called Cost-Volume-Profit analysis. This technique can show the effect of changes in an organization’s volume of activity on its costs, revenue and profit. CVP analysis can be used not only manufacturing companies but also service businesses such as hotel, hospital and tourism companies etc. For CVP to be valid, the following must be within the relevant range as the picture is shown above. The total revenue should be linear The total expenses should be linear The sales mix remain constant In manufacturing organizations, the unit produces during the period should be equal to the units sold. From the CVP analysis, we can know how much products/services must be sold to reach the target profit or achieve break-even. It is important for an organization to know whether business is profitable or not. From the contribution income statement, managers can recognize the effects on profit from changes in volume. Management can predict what the future will hold if the variables are altered, for example, cost of materials can change. For an organization selling multiple services, with the help of CVP analysis, the management can know the impact on profit of changes in sales volume, prices, variable costs, fixed costs, or the sales mix itself. Management can benefit substantially...
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...According to Azcentral.com (2014), “CVP analysis, or cost-volume-profit analysis, is used in managerial accounting to quickly calculate metrics that provide insight into the current and future performance of a business CVP analysis is very useful for all business, but small businesses benefit the most because it is mathematically simple” (para 1). CVP techniques can save managers a great deal of time without any loss of information. Some of CVP techniques that are affective and many business owners use these techniques frequently are break even analysis, target profit, and margin of safety. • Break –Even Analysis is one of the most common CVP analysis techniques because it allows business owners to conduct an analysis to determine the level of sales or unit sold that can result in zero profit. Although zero profit isn’t a goal of any business, knowing the level of sales results in break even analysis tells companies that they’ve made enough revenue to cover the company’s fixed expense. • Target Profit CVP Analysis is performed to determine the level of sales needed to make a target profit. Target profit also assumes fixed cost does not change and product sales stays the same so business owners want to be careful when using this analysis. • Margin of Safety analysis is used to determine the number of units, sales dollars or percentage of sales dollars. Margin of safety over time tells business owners that costs are increasing, sales are decreasing or both. The margin...
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...Cost-Volume-Profit Analysis Southern New Hampshire University Cost –Volume-Profit (CVP) analysis is a technique that managers can use to predict the effects of sales and product costs of a business. It deals with how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more different products. There are assumptions that this technique has which include: 1) All costs can be categorized as variable or fixed 2) Sales price per unit, variable costs per unit and total fixed cost are constant. 3) All units produced are sold. In the Hampshire Company scenario, these three assumptions are met and calculations are made based on these assumptions. The costs are used to calculate the necessary totals that aid in the strategic planning this analysis provides. Managers are able to determine the break-even point; which allows them to know at what level of sales the company will begin making a profit. Hampshire Company has a break-even point of $615,036 in sales before it begins making a profit. Managers are also able to determine the operating leverage of their company, how many units must be sold to reach a specific income goal, as well as make decisions regarding business offers from customers and businesses. This information allows a company to make short-term economical decisions that can impact their long-term financial growth. CVP is a technique that is widely used within companies and can really prove to...
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...priceless if ran properly. This paper will show an estimate amount of variable costs and monthly sales in members and dollars for Snap Fitness. Also included are five examples of variable costs and a summary about purchasing a franchise and the decisions that come along with it. Estimate Amount of Variable Costs A Snap Fitness franchise is estimated to incur fixed operating costs of $4,000 and $2,000 to lease fitness equipment. A newspaper article providing details about fitness centers like Snap Fitness states this form of business may only require 300 members to reach its break-even point. The cost-volume-profit, also known as CVP, analysis will assist Snap Fitness in determining the effects of changes of volume and costs on the business’ profits. The CVP analysis will help the new franchise apply appropriate profit planning. The CVP analysis determines profit by subtracting total revenue from total costs. The equation separates costs into variable and fixed. The equation coverts to profit = total revenue - total variable costs - total fixed costs. The newspaper stated the average break-even point would be 300 members and each member pays a $26 monthly fee to attend a Snap Fitness center. The break-even point in dollars would be $7,800. With a minimum of 300 members the total revenue for the month is $7,800. The business has estimated total fixed costs of $6,000. To estimate the amount of variable...
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...United International University School Of Business Assignment of Managerial Accounting TOPICS: CVP Analysis on Chotpoti Business Submit to: PROF. DR. Habibur Rahman (FCMA) SCHOOL OF BUSINESS UNITED INTERNATIONAL UNIVERSITY Submitted by: Name : x ID : x Semester : Summer2010 Masters of Business Administration Date of submission: 21st August, 2010 CVP on Chotpoti Business Chotpoti Bushiness Young to old all type of people like to eat chotpoti which one of the most popular item for any occasion. Chotpoti business focuses two types of business, one of them is Chotpoti & another one is Fuchka. Here there almost everywhere like, beside, infront or behind the educational institution, market, office or road we can see Chotpoti van and also huge people gather surrounding the van. This business is attractive for small investors. Here investors can get smart output by small input. It is most popular business in our country. |Item |Cost (TK) (Daily) | |Van |300 | |Charge light |250 | |Kerosine Oil |700 ...
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...CVP Case Study 1: [15 marks] YOU SHOULD WORK ON THIS PART OF THE PROJECT INDIVIDUALLY. Magic Manufacturing's sales slumped badly in 2012. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 600,000 units of product: Net sales $2,400,000; total costs and expenses $2,540,000; and net loss $140,000. Costs and expenses consisted of the amounts shown below. | Total | Variable | Fixed | Cost of goods sold | $2,100,000 | $1,440,000 | $660,000 | Selling expenses | 240,000 | 72,000 | 168,000 | Administrative expenses | 200,000 | 48,000 | 152,000 | | $2,540,000 | $1,560,000 | $980,000 | | | Management is considering the following independent alternatives for 2013. | | 1. | Increase unit selling price 20% with no change in costs, expenses, and sales volume. | 2. | Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 3% commission on net sales. | 3. | Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 54% variable and 46% fixed. | | | Instructions (a) | Compute the break-even point in dollars for 2012. | (b) | Compute the break-even point in dollars under each of the alternative courses of action. (Round all ratios to nearest full percent.) Which course of action do you recommend? | CVP Case Study 2: [45 marks] Pittman...
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...CVP Analysis of 2012 A critical aspect that managers must be aware of in order to make sound decisions and precise projections is the understanding of the relationships among costs, volume and the company’s profit; otherwise known as CVP analysis. CVP analysis stands for Cost-volume-profit analysis which a form of cost accounting in managerial economics. The five essential concepts underlying CVP analysis include: 1. The behavior of both costs and revenues as being linear throughout the relevant range of activity 2. Costs categorized as either fixed or variable costs 3. The only factors that change affecting costs are fluctuation in activity 4. Inventory levels will not change 5. The sales mix of products will not change Furthermore, there are standard components that determine CVP analysis such as volume of sales, the unit selling prices, the variable cost, and fixed costs. Sales price per unit The sales price unit indicates the price at which each unit of inventory is sold for. Here are the following sales prices for each of the items sold at a Pizza Hut venue in 2012. Pizza $16.50 Chicken Meals $9.00 Side Dishes $3.00 Desserts $2.50 Beverages $2.00 Volume sold The volume sold is the number of individual inventory or total sales of a company within a particular timeframe. In the case of Pizza Hut, the volume sold for the 7556 U.S locations was recorded in 2012 as: Specific Inventory | Amount sold in individual stores | Amount sold...
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...You are selling a personal computer accessory. Projections based on recent experience are: Sales (units) . . . . . . . . . . . . . . . . . . . 20,000 per year Selling price . . . . . . . . . . . . . . . . . . . PhP 60 per unit Purchase cost . . . . . . . . . . . . . . . . . PhP 36 per unit Advertising expense . . . . . . . . . . . . PhP 60,000 per year Delivery expense . . . . . . . . . . . . . . . PhP 6 per unit Sales salaries and commissions . . . PhP 40,000 per year + 10% of sales Utilities expense . . . . . . . . . . . . . . . PhP 30,000 per year Depreciation of sales facilities . . . . . PhP 15,000 per year Clerical expenses . . . . . . . . . . . . . . PhP 10,000 per year + PhP 0.60 per unit sold Insurance expense . . . . . . . . . . . . . PhP 5,000 per year a. Comment on the projected operating performance if it is deemed that the sales volume projection could vary by as much as ± 20%. Indicate the quantified bases involved. With sales increasing/decreasing by up to 20% (16,000; 24,000 units), profit will change by 66% from “best estimate.” This indicates a 3X degree of leverage (the effect of having fixed costs). In the projected operating range (20,000 units ± 20%), no loss is foreseen; breakeven is about 14,000 units (= 160,000 / 11.40) USP 60.00 UVC: Purchase cost 36 Delivery expense 6 Sales commissions (10% of USP) 6 Clerical expenses...
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...ﻣدى ﻓﺎﻋﻠﻳﺔ ﻧظم اﻟﻣﻌﻠوﻣﺎت اﻟﻣﺣﺎﺳﺑﻳﺔ ﻓﻲ اﻟﻣﺻﺎرف اﻟﺗﺟﺎرﻳﺔ اﻟﻌ اﻗﻳﺔ اﻷﻫﻠﻳﺔ ﻣن وﺟﻬﺔ ﻧظر اﻻ ة دار ر إدﻣون طﺎرق إدﻣون ﺟﻝ إﺷـ اف اﻟدﻛﺗور ر ﻋﺑد اﻟﺳﺗﺎر اﻟﻛﺑﻳﺳﻲ ﻗدﻣت ﻫذﻩ اﻟرﺳﺎﻟﺔ اﺳﺗﻛﻣﺎﻻً ﻟﻣﺗطﻠﺑﺎت اﻟﺣﺻوﻝ ﻋﻠﻰ درﺟﺔ اﻟﻣﺎﺟﺳﺗﻳر ﻓﻲ اﻟﻣﺣﺎﺳﺑﺔ إﻋــداد اﻟطﺎﻟب ﻗﺳم اﻟﻣﺣﺎﺳﺑﺔ ﺟﺎﻣﻌﺔ اﻟﺷرق اﻷوﺳط ﻛﻠﻳـﺔ اﻷﻋﻣﺎﻝ أﻳﺎر / 0102 م ﺗـﻔـوﻳــض أﻧﺎ إدﻣون طﺎرق إدﻣون ﺟﻝ أﻓوض ﺟﺎﻣﻌﺔ اﻟﺷرق اﻷوﺳط ﺑﺗزوﻳد ﻧﺳﺦ ﻣن رﺳـﺎﻟﺗﻲ اﻟﻣﻌﻧوﻧـﺔ "ﻣـدى ﻓﺎﻋﻠﻳﺔ ﻧظم اﻟﻣﻌﻠوﻣﺎت اﻟﻣﺣﺎﺳﺑﻳﺔ ﻓﻲ اﻟﻣﺻﺎرف اﻟﺗﺟﺎرﻳﺔ اﻟﻌ اﻗﻳﺔ اﻷﻫﻠﻳـﺔ ﻣـن وﺟﻬـﺔ ﻧظـر اﻻ ة" دار ر ورﻗﻳ ــﺎ واﻟﻛﺗروﻧﻳ ــﺎ ﻟﻠﻣﻛﺗﺑ ــﺎت، أو اﻟﻣﻧظﻣ ــﺎت، أو اﻟﻬﻳﺋ ــﺎت واﻟﻣؤﺳﺳ ــﺎت اﻟﻣﻌﻧﻳ ــﺔ ﺑﺎﻷﺑﺣ ــﺎث واﻟدرﺳ ــﺎت ا اﻟﻌﻠﻣﻳﺔ ﻋﻧد طﻠﺑﻬﺎ. اﻻﺳم: إدﻣون طﺎرق إدﻣون ﺟﻝ / 0102 م اﻟﺗﺎرﻳﺦ: / اﻟﺗوﻗﻳﻊ: ب ﻗ ار ﻟﺟﻧﺔ اﻟﻣﻧﺎﻗﺷﺔ ر ﻧوﻗﺷت ﻫذﻩ اﻟرﺳﺎﻟﺔ وﻋﻧواﻧﻬﺎ: "ﻣدى ﻓﺎﻋﻠﻳﺔ ﻧظم اﻟﻣﻌﻠوﻣﺎت اﻟﻣﺣﺎﺳﺑﻳﺔ ﻓـﻲ اﻟﻣﺻـﺎرف اﻟﺗﺟﺎرﻳﺔ اﻟﻌ اﻗﻳﺔ اﻷﻫﻠﻳﺔ ﻣن وﺟﻬﺔ ﻧظر اﻻ ة". دار ر / / 0102 م وأُﺟﻳزت ﺑﺗﺎرﻳﺦ اﻟﺗوﻗﻳﻊ ............................ ............................ ........................... أﻋﺿﺎء ﻟﺟﻧﺔ اﻟﻣﻧﺎﻗﺷﺔ رﺋﻳﺳﺎً ﻣﺷرﻓﺎً ﻋﺿواً ﺧﺎرﺟﻳﺎً اﻟدﻛﺗور: ظﺎﻫر ﺷﺎﻫر اﻟﻘﺷﻲ اﻟدﻛﺗور: ﻋﺑد اﻟﺳﺗﺎر ﻋﺑد اﻟﺟﺑﺎر اﻟﻛﺑﻳﺳﻲ اﻷﺳﺗﺎذ اﻟدﻛﺗور: أﺣﻣد ﺣﺳن اﻟظﺎﻫر ج ﺷﻛـر وﺗـﻘـدﻳـر أﺗوﺟﻪ ﺑﻌﻣﻳق وﺧﺎﻟص اﻟﺷﻛر واﻟﺗﻘدﻳر ﻷﺳﺗﺎذي اﻟﻔﺎﺿﻝ اﻟدﻛﺗور ﻋﺑد اﻟﺳﺗﺎر اﻟﻛﺑﻳﺳﻲ، ﺣﻳث ﻛﺎن ﻟﺗﻔﺿﻠﻪ ﺑﺎﻹﺷ اف ﻋﻠﻰ ﻫذﻩ اﻟرﺳﺎﻟﺔ أﻛﺑر اﻷﺛر ﻓﻲ إﺛ اﺋﻬﺎ ﺑﺄﻓﻛﺎ ﻩ اﻟﻧﻳ ة، وﻣﻌﻠوﻣﺎﺗﻪ اﻟﻘﻳﻣﺔ، ﻓﻠم ر ر ر ر ﻳﺑﺧﻝ ﺑﺟﻬدﻩ أو ﻧﺻﺎﺋﺣﻪ، وﻛﺎن ﻣﺛﺎﻻ ﻟﻠﻌﻠﻣﺎء اﻟﻣﺗواﺿﻌﻳن ﻓﻲ ﺗوﺟﻳﻬﺎﺗﻪ...
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...Marketing Management Cartridge World James C. Nelson Kaplan University MT450 Marketing Management Professor Bietsch Aug 17, 2014 In today’s business aspect, everyone is trying to get the leg up on another company. These companies come up with innovative and creative ways to either make their products better, increase profitability or both. In order to figure out what the consumer needs, we have to develop a method of figuring what the market needs. We do this in a variety of ways such as surveys, offering free products or even putting an item on the market in a specific area to see if this will be a marketable product or service. Lets look at how to illustrate the research process, utilize secondary data process, developing a primary data plan and predict the market potential and forecasting. Lets begin with illustrating the research process. In order to illustrate the research process, we need to identify the basic 5-step process; description, evaluation, explanation, prediction and decision making. With Cartridge World, they will want to give the full description of the consumers. This will include their age, sex, education, income, etc (Akrani 2013). Cartridge World will also want to give full descriptions of their competitors and the current market situations. Next, Cartridge World will want to evaluate the market. By researching, this will help the company evaluate itself and the companies performance. Next,...
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