Cost Volume Profit Analysis

Cost volume profit analysis – are useful to start-up business, launching new product, reducing the cost, increasing the selling price and calculating the impact in the business. It answers the ff: questions How much I need to sell to achieved the target income?

How will income be affected if I reduce the selling price to increase sales volume?

What will happen if I expand the capacity of the plant?

Classification of Costs

Fixed costs – remains the same even if the activity or volume of activity level changes. Per unit remains the same as the activity level changes

Variable costs – changes as the activity level changes, per unit changes as the wide ranges of activity level changes

Mixed costs contain fixed portion that is incurred even if the facility is unused and a variable portion that increase with the usage.

Step cost – total cost remains unchanged within a narrow range of activity.

The break even point expressed in units and dollar sales in which the sales level at which the company neither incurs a loss or profit. Fixed cost/ cm per unit or sales dollar

Unit sales price – unit variable cost /contribution margin ratio

Sales needed to achieved the target income

Unit sales = Fixed cost + target income / contribution margin per unit

Dollar sales = Fixed cost + target income / contribution margin ratio

Margin of safety is the amount in which sales may decline before reaching break even.

Margin of safety provides a quick means of estimating income at any level of sales Operating income = margin of safety x contribution margin ratio

Margin of safety level of sales =Actual sales- break even sales

Considerations in Break even analysis

A. Different products with different Margins

B. Determining semi variable cost elements

C. Complying with the assumption of cost volume profit analysis

Sales mix is the relative combination in which company’s different products sold.

A limited range of activity called the...