Cost- volume- profit analysis Essay Example

CVP analysis 8

  1. Target profit in units =fixed costs + desired profit

Unit contribution margin

= FC +π/ P-V

= $50000 + $40000

= $90000/19

= 4736.84

= 4737 units

Where FC = fixed costs,

π = desired profit

P = unit selling price

V = unit variable costs

2. Target profit in units =fixed costs + desired profit

Unit contribution margin

= FC +π/ P-V

= $75000 + $ 95000

= $ 170000

= 12142.86

= 12143 units

Target profit in units =fixed costs + desired profit

Unit contribution margin

π u = FC +π

P-v (π u) = FC +π

P (π u) = FC +π + v (π u)

p = FC +π + v (π u)

Where π u = target profit units

= $80000 +100000+ 60000(17)

= 1200000/60000

4. Target profit in units =fixed costs + desired profit

Unit contribution margin

=FC- π/p-v

= $30000+ 45000

= 3750 units

5. Target profit in units =fixed costs + desired profit

Unit contribution margin

π u = FC +π/ P-V

π u (P-V) = FC + π

FC = π u (P-V) — π

= 28000 (27 -13) -50000

= (28000× 14) -50000

= 392000 -50000

But there is initial $42000, therefore, additional fixed cost

= $342000 -40000

= $ 302000

But break even sales = FC /P-V

= 28000(42600/15000)

= 28000/2.84

= 9859 units

Break even in dollars = 9859 (153000/15000)

= $100562/153000/15000

Sales price

Variable cost

Variable cost

Contribution margin

Less fixed costs

Net income

Weighted average contribution margin = total contribution/ total sales units

= 42600/15000 = $2.84

Break even point = fixed cost/ weighted average contribution

= 28000/2.84

= 9860 units

Sales dollars = 9859× (153000/15000) = $100562

A units = 9860 ×0.20 =1972 units

= 1972 × 10 =$ 19720

B units = 9860 ×0 .333= 3254 units

= 3283 × 12 = $39396

C units = 9860 × 0.4667 = 4634 units

= 4605 × 9 = $41445

7. Meaning of the term cost-volume- profit relationship

The term cost- volume-profit relationship implies the relationship that exists between the cost of producing a certain volume of production and the profit associated with the level of production. In other words, it is a relationship that shows how profits as well as costs change when the volume of production is changed. The relationship looks at how profit is affected by changes in factors such as variable costs, fixed costs, selling price and the mix of the products sold.

Understanding this relationship is very important to the management as it will be able to deal with planning decisions which include;

  1. How much the company will produce in a bid to achieve a certain level of profit (target profit)

  2. What volume of production the company will produce so as to break even and avoid running at a loss

  3. What profit the company can expect by operating at a certain level of production.

  4. How changes in selling prices, output levels as well as various costs would affect the company’s profitability

  5. How a change in the mix of the products sold would affect the breakeven, target volume as well as the profit potential of the firm ((Paul, 2010).

As such, the management will be able to make decisions on the types of products to manufacture or sell the pricing policy to be followed by the firm, the marketing strategy to adopt and the types of production facilities to acquire.

8. Identification of the numbered components of the break even chart

2. Units sold

3. Total cost

4. Fixed costs

5. Margin of safety

6. Break even point

7. Loss area

8. Profit area

9. Total revenue

b. significance of the relevant range in BEP

The relevant range is the range of activity in which the company is expected to operate during the given period. It is important in cost volume profit analysis in that the behavior of costs is linear within the relevant range. Therefore, extrapolating the graph beyond this point is risky as there would be no true observations beyond the range ((Paul, 2010). For instance, fixed costs are expected to remain constant only for a specific range of activity i.e. the relevant range beyond which they stop being constant. CVP analysis is only useful within this range where the behavior of costs and selling prices can be predicted with reasonable accuracy.

9. Limitations of conventional cost-volume-profit analysis

i) The analysis is restricted to the relevant range specified beyond which the results can be unreliable.

ii) The analysis assumes that only volumes affect costs while in real sense, other factors such as inflation, efficiency, technology and capacity affect costs and hence profits (Paul, 2010).

iii) It is impractical to assume that sales mix remain constant owing to the fact that this depends on the changing levels of demand.

References:

Paul, D 2010, Accounting principles, Oxford university press. Oxford.