COST VOLUME PROFIT

ANALYSIS
LECTURE 3

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Learning Objectives:
• The objective of this lesson is to:

1. Explain how changes in activity affect contribution

margin and operating income
2. Show the effect on contribution margin of changes in
variable and fixed cost, selling volume and price.
3. Compute the break even point.
4. Compute the margin of safety.

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COST-VOLUME-PROFIT RELATIONSHIP
• CVP relationship is a tool in making decision in an organisation.

• It
helps managers understand the interrelationship between cost,
volume, and profit in an organisation by focusing interaction among
the following elements:
1. Price of the product
2. Volume of level of activity
3. Per unit variable cost
4. Total fixed cost
5. Mix of product sold
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COST-VOLUME-PROFIT RELATIONSHIP
The relationship also would provide the answer regarding:
1. What product to manufacture or sell?
2. What pricing to follow?
3. What market strategy to employ?
4. What type of productive facilities to acquire?

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COST VOLUME PROFIT ANALYSIS
• CVPanalysis is an examination of the relationship
between output, revenue and net profit in a
systematic way.

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DETERMINATION OF BREAK EVEN
POINT
• Break even point (BEP) occurs where there is no profit or loss (total cost
equal total sales revenue).
• Break even point can be stated either in units or in term of value.
• Break even point occurs when CONTRIBUTION is enough to cover fixed
costs.
Total Contribution = Total sales – Variable costs
(Selling Price x units) – (Unit Variable Cost x Units)

Contribution per unit = Total contribution margin / volume

Selling Price – Unit Variable Cost
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USING MATHEMATICAL METHOD TO
FIND BEP
Assume that:
• Q = the quantity of sales or production
• SP = selling price per unit
• UVC = Unit variable cost or Variable cost per unit
• FC = Fixed costs
• CM = Total contribution margin
• UCM = Unit contribution margin

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USING MATHEMATICAL METHOD TO
FIND BEP
Profit = Total sales – Total costs
(Q X SP) – (UVC X Q) - FC

Net Profit = CM - FC
(Q X UCM) - FC

BEP (Units) = FC / (SP-UVC)

BEP (RM) = BEP (units) x SP
BEP (RM) = FC / CS Ratio

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TARGET SALES AND TARGET SELLING
PRICE
Target sales (units) = (Fixed costs + target profit) / UCM
Target sales (RM ) = Target sales (units) x SP or

Target sales (RM) = Fixed costs + target profit

Contribution to sales ratio

Target selling price Fixed costs + variable costs + profit

Volume Q

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MARGIN OF SAFETY
• Margin of safety (MOS) indicates how much sales could drop from the
current level before a business suffers a loss.
MOS (units) = Existing sales (units) – BEP (units)
MOS (RM) = MOS (units) x SP or
MOS (RM) = Sales (RM) – BEP (RM)
% MOS = Sales (RM) – BEP (RM) / Sale (RM)

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ILLUSTRATION
Given that:
• Fixed cost per annum = RM30,000
• Selling price = RM10
• Unit variable cost = RM5
• Existing sales = 7,000 units

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Consider the following independently.
1. Calculate the number of units to be sold to break even.
2. Calculate the sales revenue to be attained to break even.
3. Determine the current profit.
4. How many units are needed to be sold to obtain RM20,000 profit?
5. Find profit or loss if there is a reduction of 10% in UVC and aRM5,000
increase in fixed costs, assume current sales is maintained.
6. What should selling price be if a profit of RM20,000 is to be maintained at
9,000 units sales?
7. How much additional volume is needed to meet RM8,000 extra fixed
costs while obtaining the current profit level?
8. Calculate margin of safety in units and Ringgit.
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THANK YOU

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