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Topic 10: Cost-Volume-Profit Analysis - Coggle Diagram
Topic 10: Cost-Volume-Profit Analysis
CVP Analysis involves estimating costs and volumes of sales to determine the effect on profit. We need to understand cost behaviour.
Costs
Fixed costs
are those that stay the same in total regardless of the number fo units produced or sold
Variable costs
are the costs that change in total each time an additional unit is produced or sold. The more units produced, the higher the total cost.
Mixed costs/Total costs = Fixed + Variable Costs
CVP analysis of single product
Break even = total costs and total revenue is the same; no profit.
Contribution margin
(defined as the excess of sales revenue over the variable costs)= selling price per unit - variable costs per unit
Break-even
= fixed costs/ contribution margin per unit
Target profits
(making an adjustment to break-even formula will provide the calculation for units to be sold to reach a target profit level) = (fixed costs + target profit) / contribution margin per unit
operating leverage
= mix between entity's fixed and variable costs
high operating leverage = high proportion of fixed costs than variable costs
Outsourcing
- having part of the production process or service provided by an external party
Benefits
Quality
Cost
Risks
dependent on external party
ideas could be sold by external party
Special orders
- taking on orders as a one-off, usually at a lower price than usual