COST-VOLUME-PROFIT RELATIONSHIP

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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

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
• Breakeven points
• Units to sell to get a certain profit
• How many more to sell if Fixed Cost increased
• Selling Price
Apply CVP Formula
• Selling Price \$36
• Variable Cost \$24 per unit
• Fixed Costs \$12,000
• Units 2,000
• Profit= ?
• Put in CVP formula
CONTRIBUTION MARGIN
• 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
CONTRIBUTION MARGIN FORMAT Income Statement
• SALES
• -VARIABLE COST
• =CONTRIBUTION MARGIN
• - FIXED EXPENSES
• NET OPERATING INCOME
• Exercise 5-1 page 213
Application of CVP Data
• Exercise 5-5 page 214
• 2- Increase quality of product
BREAK EVEN (BE) IN UNITS & \$
• 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
PROFIT PLANNING
• 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?
Target Profit Analysis
• 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
Margin of Safety (MS)
• 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.
Margin of Safety formula
• 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
Operating Leverage (OL) pg 202
• 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
Operating Leverage Formula
• 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
Operating leverage proof
• 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
CM Ratio
• 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