Final MACS Ppt

8/7/2019 Final MACS Ppt

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PRESENTATION ON

Module-3

Cost Volume Profit Relationship


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Meaning

y Cost volume relationship is a technique for studying the

relationship between cost volume and profit.


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Definition:

According to Herman C. Heiser

The most significant single factor in profit planning of the

average business is the relationship between the volume of

business costs and profit.


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Profit Planning In CVPAnalysis

y Profitability of a business depend on volume of output, cost at

different level of output-both fixed and variable cost and sales.

y CVP analysis often assists in the development of detailed profit

plan by allowing management to manipulate the cost volume

profit relationship to determine the required sales volume needed

to achieve the desired profit.


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Formula:

Target profit(sales volume)=Fixed Cost +Desired Profit

contribution margin ratio


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y By manipulating CVP relationship management can determine the

sales volume corresponding to a desired profit.

y If the profit plan are feasible ,a complete budget might be

developed for this activity level.

y The required sales volume might be infeasible because of market

condition or because the required volume exceeds production or

service capacity, in which case management must lower its profit

objectives or consider other ways of achieving it


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Behavior of expenses in relation to volume

y Costs and revenues vary with different levels of activity (or

volume) is essential for decision making.

yActivity or volume may be measured:

Units of production or sales

Hours worked

Miles travelled

Patients seen


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Cont..

y Decisions :

What should be planned level of activity for next year?

Should we reduce the selling price to sell more units?

How do the costs and revenues of a hospital change if one

more patient is admitted to the hospital?


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Cont..

y Variability:

Fixed cost or period cost: A fixed cost tends to remain

unaffected by variations in volume of production

yFor Eg: rent , Deprecition, insurance on factory building, etc.


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Cont..

y Semi-fixed or Semi-variable cost: A cost which is partly

fixed and partly variable. Another type of semi- variable cost is step

cost.

y Variable cost: A cost which tends to vary directly with volume of

production.


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Sensitivity Analysis of CVPModel for changes in

Underlying Parameters

Current operating level 500 Units

Selling Price (Per unit) Rs .250

Variable (cost Per Unit) (60%) Rs .150

Contribution Margin (40%) Rs. 100

Fixed Cost Rs .35,000

Current Sales Rs .1,25,000

Now, one or more variables may be changed to see the effect on

profitability with help of CVP analysis.


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1.Changes in variable cost and sales volume

Present contribution margin Rs.100/unit

New contribution margin Rs.125/unit

Total existing contribution margin (500*100) 50,000

Total new contribution margin (450*125) 56,250

Increase in contribution margin 6,250

Reduce in variable cost from 150 to 125 by using less expensive

raw material may result in decrease in sales by 10%.


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2.Change in fixed cost and sales volume

Sales can be increased to 600 units by incurring additional

advertisement of Rs.12,000.

Existing sales (500*250) Rs. 1,25,000

New sales (600*250) Rs . 1,50,000

Increase in sales Rs.25,000

Increase in contribution margin (40% of 25,000) Rs. 10,000

Increase in fixed cost Rs. 12,000

Net decrease in profit Rs . 2,000


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3. Change in fixed cost ,variable costs and sales volume.

New variable cost / unit (Rs. 150+10% of Rs.250) Rs.175

New fixe cost (Rs35,000 -8,000) Rs. 27,000

New contribution margin (Rs. 250-175 ) Rs.75

Increase in sales (10%) 50 units

Total contribution (new)(550*75) Rs.41,250

Existing contribution (500*100) 50,000

Decrease in contribution 8,750

less:Decrease in fixed cost 8,000

Net decrease in profit 750

Company has proposal that sales staff may be paid a commission of

10% of sales instead of fixed salaries totaling Rs. 8,000.


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4.Change in selling price, fixed cost and sales volume :

New selling price (Rs.250- 10%) Rs.225

New contribution margin (Rs.225-150) Rs.75

New fixed cost (Rs.35,000 + 15,0000 Rs.50,000

New sales level (500+ 40%) 700 units

Total new contribution (700*Rs.75) Rs. 52,500

Total existing contribution (500*100) Rs.50,000

Increase in contribution Rs.25,000

Less: increase in fixed cost Rs.15,000

Decrease in net profit Rs12,500

Companys sales can be increased by 40% if

1) It reduces its S.P by 10%

2)It undertakes advertisement of Rs. 15,000


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5.Special pricing situation

Variable cost (per unit ) Rs.150

Additional variable cost 20

Desired profit (6,000/300) 20

Price to be quoted Rs.190

Order of 300 units

Additional variable cost Rs.20/unit

Desired profit is Rs.6,000


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Assumptions of CVPmodel

1. Constant sale price.

2. Costs is divided into fixed and variable.

3. Sales mix is constant.

4. Profits are calculated on variable costing basis.

5. Efficiency and productivity remain unchanged.

6. Influence of managerial policies will be constant.

7. Production and sales will be synchronized at all points of time.


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Utility model forDecision Making

y The CVP analysis has many applications in managerial decision

making:

1) CVP relationship enables management to predict profit over

wide range of volume.

2) In a lean business season, company has to determine the price

of the products very carefully.

3) Analysis of CVP relationship helps in decision making. There

are situation when management has to decide whether it should

add to its capacity or not.


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4) CVP analysis helps in profit planning in the following ways:

i. In estimating income at a particular sales level.

ii. To determine change in profit due to change in sales volume.

iii. To execute the idea of profit planning.

iv. To find out the sales required to meet proposed expenditure.

Final MACS Ppt

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