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Cost Volume and Profit Analysis - Coggle Diagram
Cost Volume and Profit Analysis
About CVP Analysis
helps managers
understand the interrelationship between cost, volume and profit
in an organisation by focusing on
interactions between five variables
Per unit variable costs
Total fixed costs
Volume or level of activity
Mix of products sold
Prices of products
Cost-Volume-profit is a vital tool in many business decisions (what products to manufacture or sell, what pricing policy to follow etc.)
Contributions Statement of profit or loss
Is the amount remaining from revenue after variable expenses have been deducted. It is the
amount available to cover fixed expenses and then to provide profits for the period
Formula
SALES
—VARIABLE COST
=CONTRIBUTION MARGIN
—FIXED COST
=PROFIT
Each month the company must generate this amount in contribution margin to break even
=(UNIT CONTRIBUTION MARGIN X BREAKEVEN UNITS)
=(UNIT CONTRIBUTION MARGIN X SALES VOLUME)
Amount remaining from sales revenue after variable expenses have been deducted
THIS IS ALSO KNOWN AS
:checkered_flag:TOTAL CONTRIBUTION MARGIN
=
FIXED EXPENSES + PROFIT
=(UNIT VARIABLE COST X SALES VOLUME)
=(UNIT SELLING PRICE X SALES VOLUME)
SALES VOLUME
=:checkered_flag:TOTAL CONTRIBUTION MARGIN/UNIT CONTRIBUTION MARGIN
Contribution Margin %
=
Contributions
/
Sales
Change in Contribution margin
=
Contribution margin ratio
X
Change in Sales
https://classroom.nextupaccounting.com/mod/page/view.php?id=8840
Break-even Point
Definition
The
level of sales
at which
profit is zero
:pencil2:
The point where
Total sales/revenue
equals
Total expenses
Always round up to the amount that will give you a profit
The point where
Total contribution margin
Equals
Total fixed expenses
Equation Method
In Units
:pencil2:
Sales= Variable expense + Fixed cost + Profit
(of R0)
In total sales
:pencil2:
Sales= Variable expense + Fixed cost + Profit
(of R0)
https://classroom.nextupaccounting.com/mod/page/view.php?id=8843
Contribution margin method
(in units)
Break-even point
(units)
:pencil2:
=Fixed costs + Profit
(of R0)
/
Contribution per unit
Break-even point
(units)
:pencil2:
=Fixed costs
/
Contribution per unit
In Rands
:pencil2:
Contribution = Fixed Costs
Break-even sales value
:pencil2:
=Fixed Cost/Contribution Margin %
https://classroom.nextupaccounting.com/mod/page/view.php?id=8842
Target Profit Analysis
Using CVP formulas to determine the
sales volume needed
to achieve a target profit
Equation method
In Total sales
:pencil2:
Sales= Variable expense + Fixed cost + Profit
(The profit desired)
Number of units to reach target profit
:pencil2: Contribution margin method(per unit)=
(Fixed expenses + Target profit)/Contribution per unit
Margin of Safety
The excess of budgeted (or actual) sales over the break-even volume of sales
Margin of safety = Sales - Break-even revenue
Margin of safety percentage
Margin of safety% = Margin of safety/Sales
Change in Item
https://classroom.nextupaccounting.com/mod/page/view.php?id=8856
Concept of Risk and Uncertainty
The
future is uncertain
and we need to make decisions on what we expect is going to happen
If we can predict different outcomes
by attaching probabilities
Probability
Biased Probability
Unbiased Probability
https://classroom.nextupaccounting.com/mod/page/view.php?id=8874