Cvp Flashcards
Cvp important for
Planning
Setting prices
Determining the best product mix
Making maximum use of production facilities
Cvp assumptions
1) costs and revenues are linear within the relevant range
2) all costs are fixed or variable
3) costs are only affected by changes in activity level
4) all units produced are sold
5) sales mix is constant if there is more than one product
Cm per unit
Unit selling price - unit variable costs
… how much $ from each unit sold left to contribute towards fixed costs & profits
Cm
(Selling price x units sold) - (variable costs x units sold)
… how much $ overall the company has left to contribute towards fixed costs and profits
Cm ratio
Cm per unit / unit selling price
Or
Total cm / revenue
… what % of each sales dollar is left to contribute towards fixed costs & profits
eg 0.28… means 28 cents of each dollar is profits
Cm q’s
How much profit will an increase in sales of X$ produce for the company?
1) Find out cm ratio
Unit cm/unit selling price
Or
Total cm/total sales
2) Times the cm ratio in decimals with proposed increase in sales
… ratio means that much of every dollar = profit
Cm q’s
Estimated profits if all units sold
Total cm (total sales - (variable costs x units)) - fixed costs
??Cm ratio decimal times units sold??
Limited resource how to decide what product gets extra machine hours
Machine hour X contribution margin per unit per machine hour
Limited resource how to calculate cm/hour
Contribution margin/how long it takes to produce product
Formula
Bep in sales
Equation
fixed costs + variable costs = bep in sales
Cm ratio
Fc/cm ratio (cm per unit/unit price)
Formula
Bep in units
Fixed costs/cm per unit
Math equation
Bep sales
Required sales dollars..
Find variable costs as a decimal of unit selling price (variable cost per unit / price per unit) = decimal
x= variable cost deicimal (vc / unit selling price) X + fc
Math equation
Bep units
required units of sales volume
Unit selling price X = vc X + fc
Formula
Mos
Mos $ = actual (expected) sales - break even sales
Target profit formula
Required sales = vc + fc + target profit
can be sales units or sales dollars
Target profit
Sales dollars
Maths
X = variable cost as percentage of selling price (variable cost/unit price) X + fixed costs + target profit
Target profit
Sales units
Maths
Unit selling price X = variable costs X + fixed costs + target profit
Formula
Target profit cm technique
required sales = (fixed costs + target profit) / cm ratio (cm unit / unit selling price)
Bep q’s
Determine what a 8% discount on selling price would have on the bep - units
New selling price = .92 times old selling price
New cm per unit = new selling price - variable costs
New bep (units) = fc/cm per unit
Bep q’s
Sales volume requirement to break even when fixed cost increases 10% and variable costs decrease 10%
Bep - units
New fixed cost = 1.1 times old fixed costs
New variable costs = 0.9 times old variable costs
New cm per unit = sale price - new variable costs
Bep in units = fixed costs / cm per unit
Bep q’s
Responding to price increases from supplier
Q- what Increase in sales is needed to gain target profit X
Saving means minusing from fc = new fc
Vc as decimal of selling price (vc / unit selling price)
X=vc decimal X + fc + target profit
Multiple products
Total cm - sales mix
(item 1 cm X q) + (item 2 cm X q)
Multiple products
Weighted average contribution unit cm
Total cm - sales mix / number of units in sales mix
Multiple products
Bep sales mix - units
Bep units = fc / weighted average cm
Implication, times the bep units by the percentage of each type they make to find out units of each type
Limitations to resources
(Which product to make and how long it takes to make it)
Cm per machine hour
Cm per unit / machine hour required
Implication
Higher cm but takes longer to make = cm per machine hour is less
This tells us which item makes more money
Limitations to resources - extra resource and how to send it
Which product to make
Cm = machine hour x cm per machine hour
Hence to max profit, company choose to make item with higher cm
Formula
Mos ratio
Mos ratio = mos in $ / actual expected sales
