CIMA C1 Unit 5 2012

Fundamentals Of Management Accounting

Cost Volume Profit Analysis

Fundamentals Of Management Accounting

Class Slides – Ian Wilson

� During this session you will be expected toDuring this session you will be expected toDuring this session you will be expected toDuring this session you will be expected to:

1. Explain the concept of Contribution & its use in cost-volume-profit analysis

2. Calculate the Break-Even point, Profit Target, Margin of Safety & P/V Ratio for a single product or service

3. Prepare Break-Even Charts & P/V Graphs for a single product or service

� CIMA students will be expected to familiar with:

� Contribution

� Breakeven data

� Margin of Safety

� C/S Ratio

� Profit Volume Charts

� What is CVP analysisWhat is CVP analysisWhat is CVP analysisWhat is CVP analysis?

� ‘the study of the effects on future profit of changes in the fixed cost, variable cost, sales price, quantity and mix’.

� The BreakThe BreakThe BreakThe Break----Even PointEven PointEven PointEven Point

� The Level of Activity at which we have no profit or Loss

� You assume that Selling Prices & Variable Costs remain constant per unit & Fixed Costs remain exactly that - Fixed

� ContributionContributionContributionContribution:

� What is itWhat is itWhat is itWhat is it?.

� This is the amount of revenue left over after the variable costs have been met, therefore, this remaining amount ‘contributes’ towards fixed costs and what is left over, after fixed costs, is ‘profit’.

� Contribution = Sales Price – Variable Cost

� Total Contribution = Unit Contribution X Volume

� Contribution = Sales Price – Variable Cost

� Total Contribution = Unit Contribution X Volume

� At the Break-Even Point, profit is Zero (0)

� Total Contribution = Fixed Cost + 0

� Breakeven = Fixed Costs

Unit Contribution

� BreakevenBreakevenBreakevenBreakeven:

� What is itWhat is itWhat is itWhat is it?.

� Breakeven is the point at which there is neither profit nor loss. At this point the contribution will equal fixed costs.

� Breakeven = Fixed Costs

Unit Contribution

� This will test us on Break-Even, Units & Revenue.

� Formula:� Breakeven = Fixed Costs

Unit Contribution

� Break-Even Sales Revenue� Break-Even Units X Selling Price

� Apart from a Break-Even situation, a Company may want to make a ‘Target’ Profit.

� This is called a ‘Contribution Target’

� Contribution Target = Fixed Costs + Target Profit

� Volume Target = Contribution Target

Unit Contribution

� Breaking Even & Reaching a Target Profit:

� The Company wishes to make a £15000 Profit & has Fixed Costs of £35000

� Answer:

� Sell to Break-Even = 7000 Units

� Sales to reach Target Profit = 10000 Units

� Margin of SafetyMargin of SafetyMargin of SafetyMargin of Safety

� What is itWhat is itWhat is itWhat is it?.

� This is the difference between the budgeted sales(projected sales) and the Break-Even sales. The figure can be financial/volume or % in its presentation.

� MoS = Budgeted Sales- Breakeven Sales

Budgeted Sales

Expressed as a % most often, multiply by 100%

� Try the Margin of Safety question,

� Question 3:

� Try the Quick Exercises 1 to 4:

� Contribution/Sales Ratio (C/S Ratio)Contribution/Sales Ratio (C/S Ratio)Contribution/Sales Ratio (C/S Ratio)Contribution/Sales Ratio (C/S Ratio)� What is itWhat is itWhat is itWhat is it?.� This is a measure of how much contribution is earned from $1 of sales

� C/S Ratio = ContributionSales

This can be used to calculate the Breakeven point.

Fixed CostsC/S Ratio

� The C/S Ratio can also be calculated in TOTAL:

� C/S Ratio = Total Contribution

Total sales

� With this exercise you have 4 answers to calculate.

� This is a much more complex question.

� Read it carefully

� There are 4 parts:

a) Calculate BEP & MoS

b) Assume 20000 pairs of shoes sold, calculate profit

c) Add a Sales Commission & Calculate Target Profit

d) BEP with increase in Advertising & Sales Price increase of 12%

� First, you CANNOT be asked to draw a diagram, it is possible you will have to interpret one though.

� To do this you must study the next 2 diagrams closely.

� They are pages 116/117 in your notes.

� They are:

1. Breakeven Chart

2. Profit Volume Chart

MoS

BudgetSalesActivity

Break-Even Chart:

BEP

Fixed Costs = Total Loss

Profit/Volume Chart