Lesson1: What is the CVP analysis?
1. What is the CVP analysis?
2. BEP?
3. C/S ratio?
4. The margin of safety?
5. The breakeven arithmetic and target profit?
Answers:
1. CVP or breakeven analysis is the study of interrelationship between Costs, Volume and Profit at various level of activity.
We have:
Revenue of Sales= Variable Costs + Contribution requied
With
->Variable Costs= Variable Cost of production( material, labour, production overhead) + Varialbe Cost of non- production( 641-V, 642-V)
-> Contribution= Fixed Cost( 627-F, 641-F, 642-F) + Profit/Loss
Notes: CVP analysis uses the principle of marginal costing ( That’s mean Costs must be distinguished into –> variable and Fixed Costs.
2. BEP?( Breakeven point)
-> BEP is the level of sales at which Revenue = Expense and NI= 0
-> BEP is the activity at which there is neither profit nor loss
Calculate;
At BEP:
+Total contribuiton= Total Fixed Cost
+ P= 0
we have
+ Revenue= Total fixed cost/ (C/S ratio)= Contribution required/ ( C/S ratio)
+ Quantity= Total fixed cost/ contribution per unit= Contribution required/ contribution per unit= Revenue/ Selling price.
3. C/S ratio( contribution/sales ratio)
-> C/S ratio is the measure of how much contribution is earned from each $ sales.
Calculate:
C/S ratio= Contributon/ Sales * 100%
ex: C/S ratio= 7%. That’s mean contribution of 7c is earned from 1$ sales.
4. The margin of safety
-> The margin of safety is difference between The expected volume and breakeven volume.
Calculate
Margin of safety = Expected volume – Breakeven volume
5. Breakeven arithmetic and target profit
target profit:
S= V+ F+ P
With P>0
–> S – V= F+ P
–> C= F+ P
Okei^^
