ManaAcc- CVP

Cost-Volume-Profit

Analysis

Arranged by

Silvia Ika Anggreini (15311040)

Muhammad Yoga Izzani (15311050)

Introduction

"All managers want to know how profits will change as the unit sold, selling price, or the cost per unit of a product or service change"

Emma Jones case

• Must pay $2,000 to rent a booth

• Purchase each package $120 (can return unsold and fully receieving the refund).

Essentials of CVP Analysis

1. Identify the problem and uncertainties

2. Obtain Information

3. Make prediction about the future

4. Make decisions by choosing among alternatives

5. Implement decision, evaluate performance, and learn

Contribution Margin

Total Revenue -Total Variable Cost

Why operating income changes as a number of unit sold changes

Contribution margin= Total Revenues - Total Variable Cost

Contribution Margin per unit= Selling Price - Variable Cost per Unit

Contribution Margin= Contribution Margin per unit x Number of unit sold

Operating income= Contribution margin-fixed costs

Breakeven Point and Target Operating Income

that quantity of output sold at which total revenues equal total

costs

Format Income Statement

Sensitivity Analysis and Margin of Safety

Sensitivity analysis is a “what-if” technique managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes.

Excel:

conduct CVP-based sensitivity analyses and to examine the effect and interaction of changes in selling price, variable cost per unit, and fixed costs on target operating income

Margin of safety

Margin of safety = Budgeted (or actual) revenues - Breakeven revenues

Margin of safety (in units) = Budgeted (or actual) sales quantity - Breakeven quantity

Example

If budgeted revenues are above the breakeven point and drop, how far can they fall below budget before the breakeven point is reached? Sales might decrease as a result of factors such as a poorly executed marketing program or a competitor introducing a better product. Assume that Emma has FC = $2,000, SP = $200, and VC per unit = $120. From Exhibit 3-1, if Emma sells 40 units, budgeted revenues are $8,000 and budgeted operating income is $1,200. The breakeven point is 25 units or $5,000 in total revenues.

Answer:

Margin of safety = Budgeted revenues – Breakeven revenues = $8,000 - $5,000 = $3,000

Margin of safety (in units) = Budgeted sales (units) – Breakeven sales (units) = 40 - 25 = 15 units

Margin of safety percentage (%) = Margin of safety in dollars / Budgeted (or actual) revenues

= $3,000/$8,000 = 37.5%

If, however, Emma expects to sell only 30 units, budgeted revenues would be $6,000 ($200 per unit x 30 units) and the margin of safety would equal:

Budgeted revenues - Breakeven revenues = $6,000 - $5,000 = $1,000

Margin of safety percentage = Margin of safety in dollars / Budgeted (or actual) revenues = $1,000 / $6,000 = 16.67%

Cost Planning and CVP

Alternative Fixed-Cost/Variable-Cost Structures

the Chicago fair organizers offer Emma three rental alternatives:

Option 1: $2,000 fixed fee

Option 2: $800 fixed fee plus 15% of GMAT Success revenues

Option 3: 25% of GMAT Success revenues with no fixed fee

Option 1: $2,000 fixed fee

Option 2: $800 fixed fee plus 15%

of GMAT Success revenues

Option 3: 25% of GMAT Success revenues

with no fixed fee

Operating Leverage

describes the effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin

Degree of operating leverage = Contribution margin / Operating income

The degree of operating leverage at a given level of sales helps managers calculate the effect of sales fluctuations on operating income.

Case

General Motors and American Airlines

Anticipating high demand for their services, these companies borrowed money to acquire assets, resulting in high fixed costs. As their sales declined, they suffered losses and could not generate enough cash to service their interest and debt, causing them to seek bankruptcy protection.

Nike

The shoe and apparel company, does no manufacturing and incurs no fixed costs of operating and maintaining manufacturing plants. Instead, it outsources production and buys its products from suppliers in countries such as China, Indonesia, and Vietnam. As a result, all of Nike’s production costs are variable costs. Nike reduces its risk of loss by increasing variable costs and reducing fixed costs.

Effects of Sales Mix on Income

Sales mix is the quantities (or proportion) of various products (or services) that constitute a company’s total unit sales.

• What is the breakeven point for Emma’s business now?
• We assume that the budgeted sales mix
• 60 units = GMAT Success sold for every 40 units = GRE Guarantee sold (a ratio of 3:2)
• bundle yields a contribution margin of $300

CVP Analysis in Service and Not-for-Profit Organizations

To apply CVP analysis in service and not-for-profit organizations, we need to focus on measuring their output. The examples of output:

CASE

Highbridge Consulting, a boutique management consulting firm. Highbridge measures output in terms of person-days of consulting services. It hires consultants to match the demand for consulting services.

Highbridge allocates a recruiting budget for the number of employees it desires to recruit.

In 2017, this budget is $1,250,000.

On average, the annual cost of a consultant is $100,000.

FC of recruiting (administrative salaries and expenses) of the recruiting department are $250,000

How many consultants can Highbridge recruit in 2017?

Let Q be the number of consultants hired:

Suppose Highbridge anticipates reduced demand for consulting services in 2018. It reduces its recruiting budget by 40% to $1,250,000 * (1 - 0.40) = $750,000.

characteristics of the CVP relationships in this service company situation:

1. The percentage drop in consultants hired exceeds the percentage drop in the recruiting budget because of the fixed costs.

2. Given the reduced recruiting budget of $750,000 in 2018, the manager can adjust recruiting activities to hire 5 consultants

Contribution Margin Versus Gross Margin

• contribution margin:

CVP and risk analysis

indicates how much of a company’s revenues are available to cover fixed costs. It helps in assessing the risk of losses

• gross margin:

a measure of competitiveness

measures how much a company can charge for its products over and above the cost of acquiring or producing them.

Gross margin = Revenues - Cost of goods sold

Contribution margin = Revenues - All variable costs