COST-VOLUME- PROFIT ANALYSIS:

BREAK-EVEN ANALYSIS AS A TECHNIQUE TO STUDY THE CVP RELATIONSHIP 17.10.12

M.Kanchan, Ph.D. Senior Researcher, Center for Leadership, Innovation and Change (CLIC), Indian School of Business Gachibowli, Hyderabad 500 032 kanchanherlekar@yahoo.co.in

C-V-P ANALYSIS FOCUSES ON THE RELATIONSHIPS AMONG THE FIVE FACTORS AND THE OVERALL PROFITABILITY OF A COMPANY:

The prices and products or services The volume of products or services produced and sold. The per unit variable costs The total fixed costs The mix of products or services produced.

C-V-P ASSUMPTIONS

The selling price remains constant for the entire relevant range. A single product or constant sales mix and the weighted average contribution margin is constant. Total cost and Total Revenue are linear functions of output. The number of units produced is equal to number of units sold. The analysis applies to relevant range only. Costs can be divided accurately into fixed and variable. Applies to short-term time horizon. Complexity-related fixed costs do not change.

C-V-P

Contribution = Sales Variable Cost or = Fixed cost + Profit /-Loss

P/V Ratio = Contribution/Sales or= Change in Contribution/Change in Sales

B-E ANALYSIS SEEKS TO ANSWER THE FOLLOWING:

*The volume of sales necessary to produce X amount of operating profit. *The amount of profit or loss at X level of sales. *The amount of profit from X% increase in sales volume.

*The additional sales volume required to maintain the current profit when selling price is reduced.

B-E CONTINUED.

The effect on operating profits if the fixed costs increase. The effect on income if the VC decrease. The effect of change in the sales mix on operating profit.

The sales volume required to achieve the budgeted sales.

OPERATING LEVERAGE

Measure of the proportion of fixed costs in a companys cost structure and is used as an indicator of how sensitive profit is to changes in sales volume.
OL= Contribution margin / net income

BEP

BEP in Units = Total FC/ Contribution /Unit BEP in Rs= Fixed Cost /PV Ratio

Sales for earning a given profit (units)=FC+Profit/C /Unit in Rs. FC + Profit/PV Ratio

MARGIN OF SAFETY

M/S = Actual Sales BEP M/S Ratio = Actual sales-BEP/Actual sales

Or = Profit/PV Ratio
Sales at which two cos earn same profit= Diff in FC/Diff in PV Ratio.

SENSITIVITY ANALYSIS

What if Analysis