COST, VOLUME, PROFIT ANALYSIS (C V P Analysis)

Definitions:
1. The break-even point is the sales volume at which the profit is zero
Break-even point = Fixed costs
Contribution per unit
2. CS ratio = Contribution

Sales revenue

3. Margin of safety is the amount by which sales must fall before a loss is made.

Margin of safety = Budgeted sales volume – break sales volume %

Budgeted sales volume

Class exercise one

Lotty Limited makes and sells a single product, the cleo. Production information is as follows:

Selling price is K150 per unit

Variable costs are K120 per unit

Fixed costs are K54,000 per year

Current sales are 3,000 units per year

Required:

(a) Calculate the contribution per unit and C/S ratio.

(b) Calculate the break-even point in units and sales revenue
(c) Calculate the margin of safety
(d) Calculate the number of units that should be produced to achieve a target profit of
K50,000.
Class exercise two
Kililabombwe Plc prepared a budget for 2018 for four products. The details are as follows:

Product Sales Selling price per unit Variable cost per unit

(000’ units) K K

W 20 40 28

X 20 80 16

Y 100 8 8.40

Z 40 20 15

Budgeted fixed overheads are K960,000 per annum.

Required:

(i) Prepare the profit volume graph for the four products.
(ii) Explain the graph to management, comment on the results shown and state the
break-even point.