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ANALYSIS
COST-VOLUME-PROFIT ANALYSIS
BEHAVIOR OF COSTS
The behavior can be explained with a mathematical
expression describing how costs change with changes in
the level of an activity.
Based on behaviour, the costs can be classified as:
Fixed Costs
Variable Costs
Mixed Costs
COST-VOLUME-PROFIT GRAPH
DETERMINATION OF BREAK-EVEN-POINT (BEP)
RELEVANT RANGE
10,000
Total revenues
(TR)
Financial
Break-even
Point
8,000
Break-even
Point
6,000
4,000
2,000
Interest
Total
Operating
Fixed Cost
Operating
loss
0
0
10
20
30
Units Sold
40
50
AN EXAMPLE
SOLUTION
Financial BEP
IMPORTANT TERMS
Margin of Safety;
For example,
Actual Sales = 15000 units; Break-even Sales= 10000
units;
Margin of Safety= (15000-10000)/ 15000 = 33.33%.
AN EXAMPLE
SOLUTION
Total fixed Cost= 120000; Sales Price (per bucket)= Rs. 30; Variable
cost (per bucket) = 360000/20000 = Rs. 18;
CMPU = 30-18= Rs. 12 per bucket.
C/V ratio = 12/30 = Rs. 0.40 per rupee of sales;
SOLUTION
(4) Desired Sales Volume to support additional PBT of Rs.
36,000;
DSV = (120000+60000+120000+36000)/ 12 = 28000
Buckets;
(5) Cash Break-even Point= Cash Operating Fixed Costs/
CMPU;
= (120000-20000)/12 = 10,000 BUCKETS
BREAK-EVEN ANALYSIS
FOR
MULTI-PRODUCT FIRM
Products
A
2,00,000
1,20,000
80,000
B
1,20,000
80,000
40,000
0.625
0.375
Total
3,20,000
2,00,000
1,20,000
75,000
45,000
0.375
200000
RESOURCES
RESOURCES
In question no. 2, suppose that total sale potential of the firm is limited to 6000 units (both
products taken together) instead of the individual sales potential of the products (earlier fixed
at 5000 each). Determine the optimal product mix.
SOLUTION
SOLUTION
(1) Max. Material available= 16000 Kg.
Max. Sales Potential of each product = 5000 units;
Since material is a constrained resource, the criteria
need to be used will be contribution per kg of material
(in general, contr. Per unit of constrained resource).
Therefore, the optimal mix that will maximize the profit will be 5000
units of Product X and 2000 units of Product Y; given these
constraints.
GRAPHICAL SOLUTION
7000
6000
OPTIMAL SOLUTION
IT CAN BE ACHIEVED BY SOLVING THE TWO
CONTRAINTS, VIZ.,
2*X+3*Y = 16000
X+Y = 6000
PRODUCT Y
5000
4000
3000
2000
1000
0
0
1000
2000
3000
4000
5000
PRODUCT X
6000
SALES CONSTRAINT
7000
8000
9000
SOLUTION
FLEXIBLE BUDGETING
FLEXIBLE BUDGETING
FLEXIBLE BUDGET
EXAMPLE
Solution
SOLUTION
CASE DISCUSSION
THROUGHPUT ACCOUNTING
THROUGHPUT ACCOUNTING
THROUGHPUT ACCOUNTING
A short-term approach;