cvp analysis Flashcards
how to calc the following
what Is cvp analysis
Cost-volume-profit (CVP) analysis is a method of evaluating the impact that varying levels of costs and volume have on a company’s operating profit.
contribution per unit
unit selling price-unit variable costs
profit
(sale volume x contribution per unit ) fixed costs
breakeven point
total fixed costs / contribution per unit
contribution/sales ration
contribution/sales. x 100
sales revenues at breakeven point
fixed costs / contribution sales ratio
margin of safety in units
budgeted sales units - breakeven sales units
margin of safety as a percentage
((budgeted sales - breakeven sales)/ budgeted sales) x100
sales volume to achieve his target profit
(fixed cost + target profit)/contribution per unit
when do we use weighted average c/s ratio
when 2 or more units are made by business
what is the formula for weighted average c/s ratio
total contribution/ total revenue
what is the breakeven revenue with multiple products formula
fixed costs / weighted average c/s ratio
what is the breakeven units with multiple products formula
fixed costs/ weighted average contribution per unit
what are the steps to finding the breakeven revenue with multiple products right
- find the contribution per unit of both products individually
2.find cs ratio of both products
- multiply cs ratio by product mix and add
- divide the fixed costs by the answer to get the breakeven units
what are the steps to finding the breakeven units with multipole products
- find contribution per unit
- multiply by respective product mixes
- add the answers up wa cont per unit
- divide fixed costs by the answer to get revenue
formula for establishing a target profit for multiple products
fixed costs + required profit/ weighted average c/s ratio
what are the limitations of cvp analysis
limited as based on the assumption that either a single product is being sold or products are being sold in a constant product mix which is not always the case
assumes all variables other than volume, remain constant i.e volume is not the only factor that causes revenues and costs to change like Eos
the total cost and total revenue function is linear. this is only is short run as it may change in future
assuming total cost has one part variable and one part fixed which is not always true nowadays
assumes that everything produced is sold and doesn’t consider inventory
what are the advantages of cvp analysis
graphical representation of cost and revenue data can be more easily understood by non- financial managers
a breakeven model enables profit and loss at any level of activity within the range for which the model is valid to be determined and
the c/s ratio can indicate the relative profitability of different products
highlighting the breakeven point and the margin of safety gives managers some indication of the level of risk involved
