 |
| Corporate practice bd |
"CVP" Stand for Cost volume profit," It is a cost accounting & Management Technique or tools where as a manger of cost accountant overview whats the changes production volume or sales volume that leads to the changes company's overall profit margin. I means % change in sales volume that result create % change in Contribution margin Simultaneously.Under CVP analysis top authority of the company can take quick decision about the Accept or Reject of the outsider business offer.
There are Three Method of CVP analysis, well known as,
01.The Equation method
02.The contribution margin method
03.The graph Method
04. Linear Equation Method = ( Y = mx +c ),Where, Y=semi variable cost,m=production units,X =variable cost,C= fixed cost which are will be find out in the question.
***Some special question***
01. Sales level, where both Unit are equally profitable(if any) use following technique
Ans:
Sales level of equal profits = Change in fixed cost / Change in CM ratio
2. CVP analysis where sales mix ratio are exist like 3:1 where no exist units sales.
3. Where no mention in the question sales units or variable cost,or sales amount,calculate BEP
01.The Equation method
In -respect to clear concept of Cost-Volume-Profit (CVP) Analysis we should first concern to CVP Relationship In Equation form,like-
Under the Equation form,
01.Profit = (Sales-variable Expense) -fixed expense
02.or Profit= (Sales *PV ratio)-Fixed expense
03.or profit %= CM ratio*M/S Ratio
04.PV Ratio= (C.M per unit/ selling price per unit)*100 [PV ratio=profit volume ratio]
05.or PV ratio=Sales ratio- variable ratio
06.or PV ratio=(Total fixed expense / BEP)*100
07.Sales = Variable expense+ fixed expense+prof
08. Variable Expense = Sales-fixed expense- profit
09. Fixed Expense = sales -variable expense-profit
10. or Fixed Expense = (Sales* C.M ratio) - Profit
Where as ,
11.BEP = Sales-variable Expense-fixed expense = 0
12.or BEP =Total Budgeted Sales-Margin of safety
13.or BEP = Contribution Margin+Profit
14.or BEP TK.= Sales*BEP ratio
15.or BEP Tk.=(Variable expense+Fixed expense )
16.or BEP ratio=100% -M/S ratio
17.or BEP ratio= (BEP /Sales)*100
18. Margin of safety=Total budgeted sales -BEP sales
19.or Margin of safety=(Profit/C.M ratio)
20.C.M Ratio =(C.M per unit/Sales per unit)*100
21.M/S Ratio=(Margin of safety/ sales)*100
22.or M/S Ratio=100%-BEP ratio
As we can see,Required sales for Target profit (before Tax)
23.Target sales unit=( FC+Profit) / C.M per unit
24. Target sales Amount =( FC+Profit) / [1-Variable cost/sales]
25.or, Target sales Amount =( FC+Profit) / [C.M ratio]
As we can see,Required sales for Target profit (After Tax )
26. Target sales unit=( FC+Profit after tax /1- tax rate) / C.M per unit
27. Target sales Amount =( FC+[Profit after tax /1- tax rate] / C.M Ratio)
02.The contribution margin method
28. Selling price per unit =****
Less: Variable cost per unit = (****)
Result, C.M per unit = ***** [C.M=Contribution Margin]
29.C.M ratio= (C.M per unit/selling price per unit)*100
30.or C.M Ratio=(Total Cm/Total sale amount)*100
31. or C.M Ratio=([Sale -VC]/ Sales)*100
32.or C.M Ratio=(100-VC %)
33.BEP in units= (FC /C.M per unit)
34.BEP in Amount =(FC /C.M Ratio)
35. Sales =(C.M+V.C)
36.or, sale = C.M/C.M Ratio
37.or,Sales = (BEP sale/BEP Ratio)
38.or,Sales =V.C/V.C Ratio
39.or,Sales =Total cost +Profit
40.Marginal cost = Prime cost+Variable cost
41.Prime cost = (Direct material cost+Direct labor cost)
Under the Operating Leverage
42.Degree of operating Leverage (DOL) =(Contribution Margin / Net operating Income)
Under the sales mix And Break even Analysis
The sales mix refers to the relative proportion in which a company's products are sold.The sales mix idea is generated for the purpose of earn greatest profit.
Why Sales mix
Most of the company's have many product but they are not equality profitable.That,s why company uses sales mix strategy with the higher C.M product line.
When CVP apply for sales Mix
43. BEP in Unit=(FC/ AV C.M Per unit) [ Where as AV= Average]
44.BEP amount=(FC/AV C.M Ratio )
Let,s start with Practical Example
Practical Example. (01)
The corporate practice bd LTD provide following Information
The corporate practice bd LTD
Contribution Income statement
For the month of January-2022
Total Amount Tk. Per unit
Sales 4000 Units (A) = Tk.10,00,000.000 250.00
Variable expense (B) = Tk.6,00,000.00 150.00
Contribution Margin (A-B) = Tk.4,00,000.00 100.00
Fixed expense (C) = Tk.3,50,000.00 -
Net operating Income(A-B-C) = Tk.50,000.000 -
Requirement
01.BEP In Units & Amount in TK
02.C,M Ratio
03.M/S Ratio
04.Margin of safety
05.Profit
06.DOL(degree of Operating Leverage)
07.Profit % on Sales
08.BEP Ratio
09.IF the company increase sales TK. 50,000.00 without effecting any changes in fixed expense .what are net operating income & sale volume increase by the decision (use only C.M approach.
10. If the company want to bid the competitor, price decrease to TK.245 per unit where as sales volume increase to 6000 units. As a result sales commission will be payable @5% of Excess sales value.Under this situation -Price decrease is the Good decision to the company? if there is no others changes. (Use C.M Approach) only
11. What are company,s overall profit when the company increase sale volume up to 6000 units?
Solution:
To solution of the above requirement we need to some calculation are mention bellow
Note-01.C.M per unit =sales per unit-V.C per unit
=(250.00-150.00)
=100.00
C.M Amount Tk. = 100 per unit*4000 units
= Tk.4,00,000.000
Note-02. C.M Ratio =(C.M Per unit/Sales per unit)*100
=(100/250)*100
= 40%
Note-03.Total Sales Amount =Sales units@ per unit
= 4000 units@250.00per unit
=Tk.10,00,000.000
Note-04.New CM =(New selling price- V.C)
=( 245-150)=95.00 per unit
Note-05.New C.M Ratio =(95/245)*100
= 38.7755%
Note-06. Excess sales Value=(6000 units-4000 units)=2000 units
=2000 units@245 per unit
=Tk.4,90,000.00
Note-07. So Sales commission=(Excess sales Value@5%)
= Tk.4,90,000.00@5%
=Tk.24,500.00
Requirement : 01.
BEP in Units & Amount in TK
We know that ,
BEP=(Fixed expense/C.M per unit)
= (Tk.3,50,000.00/100 per unit)
=3500.00units
Amount.Tk. =3500units@250 per units
=Tk.8,75,000.000
Requirement : 02.
C.M Ratio =(C.M Per unit/Sales per unit)*100=(100/250)*100
= 40%
Requirement : 03.
M/S Ratio=(Total sales Amount = BEP sales Amount)/Sales Amount
= (10,00,000.000-8,75,000.000)/10,00,000.00*100
=12.50%
Requirement : 04
Margin of safety= (Total sales Amount = BEP sales Amount)
= (10,00,000.000-8,75,000.00
= Tk.1,25,000.000
Requirement :05
Profit= (Sales*C.M ratio)- fixed expense
=(10,00,000.000*40%)-3,50,000.000
= Tk.50,000.00 (proved)
Requirement 06
Degree of operating Leverage(DOL)=(Contribution Margin / Net operating Income)
= (4,00,000.00/50,000.000)
= 8 times
Requirement :07
Profit % on Sales= (Profit/ sales)
= (50,000 /10,00,000)*100
= 5%
Requirement :08
BEP ratio=100% -M/S ratio
=100%-12.50%
= 87.50%
Sales= (8,75,000 / 87.50)*100
= Tk. 10,00,000.000 (Proved)
Requirement :09
IF the company want increase sales amount TK. 50,000.00 without effecting any changes in fixed expense.Then ,Net net operating income increase =(Tk.50,000.00*C.M Ratio)
=(Tk.50,000.00*40%)
=Tk.20,000.000
or ,Sales volume Increase = (Tk.50,000.000/ selling price per unit)
= (Tk.50,000.000/ 250 per unit)
= 200 units
or Net Profit increase=200units@100 C.m per unit)= Tk.20,000.000 (Proved)
Requirement :10
Company Earn excess profit=(Excess sales Value@New C.M Ratio)[Note-06]
=(4,90,000.000@38.7755%)
=Tk.1,90,000.000 (round)
Less: Sales commission =(Tk.24,500.000) [Note-07]
Net Excess profit earn=1,65,500.00 is good decision for the company as a whole..
Requirement :11
Calculation of company overall profit
Sale value =(sales unit@ new-selling price per unit) Note-04.
= (6000units@245per units)
=Tk.14,70,000.000
Less: V.C(6000units@150 per unit)=Tk.(9,00,000.000)
Less" sales commission=Tk.(24,500.000 )[Note-07]
Gross Margin=5,45,500.000
Less:Fixed expense=Tk.(3,50,000.000 )
Company,s overall net profit=1,95,500.000
Practical Example. (02) (under Sales Mix CVP analysis) (CMA-Jan-2023)
ABC company sells two products , product- A priced at $400 where as Product -B priced at $ 800.The variable cost per unit are $325 for product-A & $600 for product-B.Total fixed expense is $96250 .ABC company expected sales Mix is 03 for product-A & 02 for product-B
Requirement:
01.From a package of product -A & product -B based on the sales mix, and calculate the package contribution margin.
02.Calculate the break -even point in units for the two product-A & Product-B
03.Check your answers by preparing a contribution margin income statements.
Ans : (Req-01)
Each package consist 03 product-A & 02 product-B
Calculation of package contribution margin
Product-A Product-B
Selling price per unit (A) 400 800
Variable cost per unit (B) 325 600
Contribution margin per unit (A-B) 75 200
* Sales Mix 3 2
Contribution margin (Total) 225 400
Package contribution Margin for ( Product-A + Product -B) =(225+400)= 625.00 (per unit)
Ans : (Req-02
Here,
Package BEP units= Fixed cost / package contribution margin per unit
= $96,250/$625
= 154 packages
BEP (units) for product -A =154*3= 462 units
BEP (units) for product -B =154*2= 308 units
Ans : (Req-03
ABC company
Combined income statement
For the period of X
Product-A Product-B Combined
Sales (462*400) , (308*800) (A) 1,84,800 2,46,400 4,31,200
Variable cost (462*325),(308*600) (B) 1,50,150 1,84,800 ( 334950 )
Contribution margin (A-B) 34,650 61,600 96,250
Operating income (Proved) 000
Practical Example. (03)(under Fixed time basis/Hourly salary CVP analysis) (CMA-May-2023-old)
The XYZ company produce of high quality affordable sandals for beach wear.The company has already received some sales orders for the sandal sand production is due to commence next year ahead.
|
(Production & sales of 1,00,000 pairs of sandals)@27.50 |
Amount(Tk.) |
Amount(Tk.) |
|
Sales |
|
27,50,000 |
|
Cost of sales: |
|
|
|
Direct materials |
6,19,000 |
|
|
Direct labor |
4,11,000 |
|
|
variable production overhead |
2,36,000 |
12,66,000 |
|
Contribution Margin |
|
14,84,000 |
|
Administrative overhead |
3,36,500 |
|
|
Selling & distribution overhead |
1,45,000 |
4,81,500 |
|
Gross profit |
|
10,02,500 |
Note-01:
It is assumed that the company will pay workers based on a fixed time basis i.e hours worked regardless of out put achieved
Note-2:
The production, Administration and selling & distribution costs have been analyses and the cost behavior is shown below.
|
Particulars |
Fixed elements |
Variable elements |
|
Production overhead |
25% |
75% |
|
Administrative overhead |
100% |
N/A |
|
Selling & distribution overhead |
80% |
20% |
Requirement:
(I) Calculate the BEP in units (pairs of sandals) and revenue
(II) Calculate the margin of safety in units(pairs of sandals) and revenue
(III) How many pairs of sandals must be sales to make a profit of Tk.15,00,000?
***The XYZ company is considering changing the basis of paying staff from fixed time basis to a piece rate system. under the new system employees will paid Tk.4.25 per pair of sandal produce,If the company introduces this new system it will have to employ an extra production supervisor who will be paid a salary of Tk.60,000 per year.
***Assuming that the company implements new pay system***
Requirement:
(I) Calculate the new BEP in units (pairs of sandals)
(II)How many pairs of sandals must be sales to achieve the current level of profit (i.e Tk.10,02,500?
(III) which of the pay system (fixed time or piece rate) would you recommended for the company? Give reasons for your answer.
ANS:
Working Note:01
|
Particular |
Per unit |
Total |
|
Sales (A) |
$27.50 |
$27,50,000 |
|
Variable cost: |
|
|
|
Direct material |
6.19 |
6,19,000 |
|
Variable production overhead(75% of TK.2 36 000) |
1.77 |
1,77,000 |
|
Variable selling & distribution overhead(20% of TK.1,45,000) |
0.29 |
29,000 |
|
Total Variable costs (B) |
8.25 |
8,25,000 |
|
Contribution Margin(A-B) |
19.25 |
19,25,000 |
|
|
|
|
|
Fixed cost: |
|
|
|
Direct labor |
|
4,11,000 |
|
Fixed production overhead(25% of TK.2,36,000) |
|
59,000 |
|
Administrative expense |
|
3,36,500 |
|
Fixed selling & distribution overhead(80 % of TK.1,45,000) |
|
1,16,000 |
|
Total fixed cost(C) |
|
9,22,500 |
|
Profit (A-B-C) |
|
10,02,500 |
(I) Calculate the BEP in units (pairs of sandals) and revenue:
= Total fixed cost /Contribution margin per unit
=$9,22,500/19.25
= 47,922 units
Calculate the BEP in sales revenue:
= BEP in units * selling price per unit
= 47,922 units*27.50
= $13,17,855
(II) Calculate the margin of safety in units(pairs of sandals) and revenue
Assuming Actual sales= Expected sales
Margin of safety in units = 1,00,000 units-47,922 units
= 52,078 units
Margin of safety in sales revenue = (52,078*27.50 per units)=$14,32,143
(III) How many pairs of sandals must be sales to make a profit of Tk.15,00,000?
Here,
Target profit in units =(Total fixed cost+ target profit) /Contribution margin per unit
=(9,22,500+15,00,000) / 19.25
= 1,25,844 pairs of sandals
Requirement D, ( change in basis of paying staff:
Working Note:01
| selling pric per pairs of sandals | 27.50 | |
| Revised variable cost: | ||
| Direct materials | 6.19 | |
| Direct labor | 4.25 | |
| Variable production overheads(75% of Total) | 1.77 | |
| Variable selling distribution overhead(20% of Total) | 0.29 | |
| Total variable cost | 12.50 | |
| Revised contribution | 15.00 | |
| Revised fixed cost: | ||
| Fixed production overhead(25 % of Total) | 59,000 | |
| Salary of extra supervisor | 60,000 | |
| Administrative overhead | 3,36,500 | |
| Fixed selling & distribution | 1,16,000 | |
| Total Fixed cost | 5,71,500 |
I) Calculate the New BEP in units (pairs of sandals) and revenue:
= Total fixed cost /Contribution margin per unit
= $5,71,500/15
= 38,100 pairs of sandals
Calculate the BEP in sales revenue:
= BEP in units * selling price per unit
= 38,100 units*27.50
= $10,47,750
(II) How many pairs of sandals must be sales to make a profit of Tk.10,02,500?
Here,
Target profit in units =(Total fixed cost+ target profit) /Contribution margin per unit
=(5,71,500+10,02,500 ) / 15
= 1,04,933 pairs of sandals
(III) Which of the pay system (fixed time or piece rate would you recommended for the company?
The company may prefer the piece rate pay system as
Fixed cost are lower, which puts less pressure on the company to make profit
BEP point in units is lower the company needs to sell a lower quantity to cover its cost
The company may prefer the fixed time system as
the company needs to sell a lower quantity to achieve its current profit Level (1,00,000 pairs compare to 1,04,933 pairs)
staff may be feel more secure & motivated to work as they have a fixed amount of pay.
Linear Equation Method = ( Y = mx +c ),Where, Y=semi variable cost,m=production units,X =variable cost,C= fixed cost which are will be find out in the question.
Practical Example. (03)(CMA-May-2022) ( under Linear Equation Method)
From the following data of ABC company LTD.Find Variable cost and Fixed cost by using Linear equation Method.
|
Month |
Production in units |
Semi variable costs (TK) |
|
January |
100 |
500 |
|
February |
175 |
650 |
We know that,