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COST-VOLUME-PROFIT RELATIONSHIP - PowerPoint PPT Presentation

COST-VOLUME-PROFIT RELATIONSHIP. CHAPTER 5. CVP Formula. Sx = VCx + FC + P S= Selling Price X= Sales Volume VC = Variable Cost per unit FC = Fixed Cost P= Profit Very powerful equation If all else fails just work the equation. Things you can find out using CVP formula.

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COST-VOLUME-PROFIT RELATIONSHIP

CHAPTER 5

• Sx = VCx + FC + P

• S= Selling Price

• X= Sales Volume

• VC = Variable Cost per unit

• FC = Fixed Cost

• P= Profit

• Very powerful equation

• If all else fails just work the equation

• Breakeven points

• Units to sell to get a certain profit

• How many more to sell if Fixed Cost increased

• Selling Price

• Selling Price \$36

• Variable Cost \$24 per unit

• Fixed Costs \$12,000

• Units 2,000

• Profit= ?

• Put in CVP formula

• The amount that contributes to fixed costs and profits i.e Contribution

• Calculated In per unit, \$ and in %

• \$100 Sales

• 60 VC

• \$ 40 CM 40% Ratio (\$40/\$100= .40)

• 35 FC

• \$ 5 NI

• SALES

• -VARIABLE COST

• =CONTRIBUTION MARGIN

• - FIXED EXPENSES

• NET OPERATING INCOME

• Exercise 5-1 page 213

• Exercise 5-5 page 214

• 2- Increase quality of product

• The units or \$ that will cover the fixed costs with no profit.

• Sx – VCx= FC BE in equation method

• FC/CM% = BE\$ CM Method

• You can determine: BE in units, BE in \$

• Exercise 5-7 pg 214

• How many do I need to sell to make \$100,000 profit

• For example: If I reduce my fixed costs by \$2,000 and increase my sales in units by 100 how will my profit change?

• Formula for units to make a \$ profit

• FC + Profit

• Unit CM

• X sales price = Sales to attain target profit

• Exercise 5-6 pg 214

• 1- equation method

• 2- CM approach

• Amount you can drop before losses are incurred

• How much can our sales drop before we start losing money

• Every company has a different % because each is structured differently

• How much excess you have over break even.

• How much you have after you cover your fixed costs.

• Budgeted Sales – BE\$ = MS\$

• MS\$/Budgeted Sales=MS%

• Example:

• Sales \$100,000

• BE\$ 87,500

• MS\$ \$ 12,500 / 100,000 = 12.5%

• Exercise 5-8 page 214

• How sensitive income is to a % change in Sales \$

• How a % change in Sales volume will affect profits.

• It is a Multiplier

• If OL is high a small % change in Sales will reuslt in a higher change in NI

• Contribution Margin \$

• Net Income in \$

• It OL is 2 and sales increased by 5% then net income will increase by 10%

• Exercise 5-9 pg 215

• Sales 100,000 110,000

• VC 60,00066,000

• CM 40,000 44,000

• FC 35,000 35,000

• NI 5,000 9,000 \$4,000

• OL 40,000/5000= 8 times x 10%

• 80% x \$5000 = \$4000

• Another way to determine effect on net income

• Change in Net Income with the change in Total Sales

• If we sell 10,000 more units, how would our net income increase?

• 10,000 X25%CM= 2500 change in units X \$24 per unit = \$60,000 increase in NI

• How much would our net income increase if our sales increase by \$240,000

• \$240,000 X 25% = \$60,000

Sales Mix Multi Product CM

• Proportions in which a company’s products are sold

• Mix that will yield the greatest profit

• Steps to determine

• 1- Total all sales

• 2- VC % for each product and total sales

• 3- = CM% for all sales

• 4- Determine total BE\$ FC/CM%

• 5- Each product % of total sales X BE\$

• 6- Use VC% for each product for VC

• 7- =CM for each product = total fixed costs

• Page 206 Exhibit 5-4

• Exercise 5-10, pg 215