CVP Analysis Notes

This topic revolves around management decisions on hopefully profitable marketing

situations. eg. How much profit do we expect at the moment ?
What if we reduce selling price and therefore sell more ?
What if we pay our sales people by commission not salary ?
There is only one formula that is needed for this topic:

P = ( S - VC ) Q - FC

There are five unknowns in the formula: (1) Profit (2) Selling Price per unit (3)
Variable Cost per unit (4) Quantity expected to be sold (5) Fixed Costs in total.

The Leaving Cert questions ask three things:

(1) In any question we are given four of the unknowns and are asked to find the
last one. In all cases we use the formula above. The difficult thing may be
finding how to restate the formula with the new figures.
(2) Draw the breakeven chart as follows:
(i) draw X and Y axes labelling the X axis as €s' and the y as units
(ii) find Breakeven Point in units and sales value (NB. sales value is units X
Selling Price)
(iii) place the BEP in the middle of the graph an label the BEP numbers on
the axes
(iv) draw a line from the origin through the BEP, label it Sales Revenue (SR)
(v) put the FC amount on the X axis, draw a line from it through BEP and call
it Total Cost (TC)
(vi) draw a vertical line up from our current units, the horizontal distance from
it to the BEP units is labelled MoS (margin of safety)
(3) Theoretical questions: eg. explain a VC, FC, mixed cost, etc.