...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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...Cost-Volume-Profit Analysis Stephanie Bowens, Janette Cruz, Noelle Lang, Velavan Nedunchezhiyan, and Judy Robertson ACC/561 Accounting November 11, 2013 Grace Kalil Managerial accounting is key part of manager's jobs. Part of it is that managers need to forecast monthly, quarterly and yearly expenses, tracking their actual expenses at the end of each cycle and determine if they stayed within their budget. Typically managers in several departments need to report their expenses to an accounting department and managerial account will be maintaining these information. Business can use this information to find out their operational cost 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...
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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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...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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...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...
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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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...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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...Case Study – Bridgestone Behavioral Health Center: CVP Analysis for Planning and Control Case Study – Bridgestone Behavioral Health Center: CVP Analysis for Planning and Control MEMO To: Dr. Thomas Russell, Executive Director, Bridgestone Behavioral Health Center From: Sheryl Marshall, Service Consulting Plus, LLC. Date: 8th September 2014 Subject: Financial performance of Bridgestone Behavioral Health Center over the next one year. Dear Dr. Russell, After having done a detailed study of the projected financial statements for the upcoming year, we have been able to identify a few glaring financial pitfalls the center has to beware of. The center has a lot of government aid provided to it but it also faces a host of challenges as the government has put various limits and caps on its volume and performance. These are the key features to be looked at when analyzing Bridgestone’s financial capabilities:- * The company receives Medicaid from various sources to facilitate its services. Key sources include the state government and certain private pay customers. * The projected budget indicates a certain level of volume which must be achieved for meager profits or breakeven. * The various facilities provided by the company include both on-campus and off-campus services, the major ones being – Group Counselling and Ambulatory Detoxification. The center’s financials show that it is just staying afloat for the past three years, despite exemplary staff performance...
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...1.0 How do the formats of the income statements shown on pages 33 and 50 of Benetton’s annual report differ from one another (disregard everything beneath the line titled “income from operations”)? Which expenses shown on page 50 appear to have been reclassified as variable selling costs on page 33? A. The income statement shown on page 33 exclusively shows the contribution margin. This format is used for internal company analysis. Benetton has chosen to show it as a part of annual report. The variable costs (Distribution and Transport costs, Sales commission) are clubbed together. This format is called the contribution format. The income statement on page 50 shows the variable costs and fixed costs more clearly. It has broken down the various costs. This format is called the absorption format. B. As highlighted earlier, the difference in the expenses shown on page 50 and 33 is that – page 50 clearly breaks down the variable expenses (Distribution and Transport costs, Sales commission), whereas in page 33 they are clubbed. If we sum up the Distribution and Transport costs, Sales commission costs for 2003 and 2004– it sums to 114 and 104 respectively. This is shown as variable cost on the format used on page 33. 2.0 Why do you think cost of sales is included in the computation of contribution margin on page 33? For a Merchandising company, the cost of sales is considered to be a variable cost. Benetton primarily designs and sells apparels. The manufacturing is completely...
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...CVP Analysis Introduction According to “Snap Fitness,” (2011), “economically, the health club industry has proven to be recession-proof, averaging an 8% annual growth rate since the early 1990’s across all health clubs and gyms,” (Fitness Franchise Opportunities). Snap Fitness franchising offers opportunities for entrepreneurs to open a successful business that has already allocated the following benefits and services for consumers and for the franchisee: Location of fitness needs is open 24/7 Can be easily operated with one employee Affordability for the owner and consumer Business training and start-up marketing include Snap Fitness clubs that have been open for 2 years as of December 31,2012 o (13%) have more than 740 members o 387 (50%) have more than 469 members o 523 (68%) have more than 305 members. This paper will identify the estimation of Snap Fitness’ start-up and variable costs with the inclusion of a cost-volume-profit analysis, the measures needed to achieve net income, its various variable costs, and an analysis on why opening a franchise with Snap Fitness would be a good idea. Estimation of Snap Fitness’ Start-up and Variable Costs (Section A) In determining what Snap Fitness estimated variables are, one needs to look at the monthly fixed costs. Currently, each location of Snap Fitness spends $4,000 in fixed operating expenses and $2,000 to lease equipment. The total of each location’s fixed cost is $6,000. To break even for their...
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...1.0 How do the formats of the income statements shown on pages 33 and 50 of Benetton’s annual report differ from one another (disregard everything beneath the line titled “income from operations”)? Which expenses shown on page 50 appear to have been reclassified as variable selling costs on page 33? A. The income statement shown on page 33 exclusively shows the contribution margin. This format is used for internal company analysis. Benetton has chosen to show it as a part of annual report. The variable costs (Distribution and Transport costs, Sales commission) are clubbed together. This format is called the contribution format. The income statement on page 50 shows the variable costs and fixed costs more clearly. It has broken down the various costs. This format is called the absorption format. B. As highlighted earlier, the difference in the expenses shown on page 50 and 33 is that – page 50 clearly breaks down the variable expenses (Distribution and Transport costs, Sales commission), whereas in page 33 they are clubbed. If we sum up the Distribution and Transport costs, Sales commission costs for 2003 and 2004– it sums to 114 and 104 respectively. This is shown as variable cost on the format used on page 33. 2.0 Why do you think cost of sales is included in the computation of contribution margin on page 33? For a Merchandising company, the cost of sales is considered to be a variable cost. Benetton primarily designs and sells apparels. The manufacturing is completely...
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