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Chapter 5 - Cost-Volume-Profit Analysis and Limiting Factor - Coggle…
Chapter 5 - Cost-Volume-Profit Analysis and Limiting Factor
Basic CVP analysis
Assumptions
Costs are either fixed or variable
Fixed costs are unchanged
Contribution per unit is constant
Sale price per unit is constant
Production = sale
Profits are maximized by maximizing total contribution
Break-even analysis
C/S ratio = Profit/Volume = Contribution / Sale
Margin of safety = (Budgeted - Break-even) / Budgeted
Break-even, Contribution, and P/V Chart
Break-even: Sale revenue, total costs, fixed costs
Contribution: Sale revenue, Variable costs, total costs
P/V Chart: Break-even point on x-axis
Advantage & Disadvantage of CVP analysis
Advantages
Easy to understand by non-financial managers
Give indication of risk level
C/S ratio indicates relative profitability of different products
Disadvantages
The assumption only relevant to a normal range of output
Uncertainty in fixed costs is ignored
Consequences of increasing or de-stock inventory is ignored
Limiting factors
Solution for 2 potential limiting factors:
Determine the scarce resource
Ranking among products
Determine optimal plan
Draw up the budget
Make or buy decision:
List variable cost of making and buying separately
Deliver extra variable cost of buying
Limiting factor saved by buying
Deliver extra variable cost of buying per hour saved
Linear programming
Slack: occurs when maximum constraint resources are not used
Surplus occurs when more than minimum requirements are used
Shadow price is the amount changed in objective function (increase in contribution) created by the availability of 1 extra unit of limited resources at its original cost