Understanding Break-Even Analysis and CVP Formulas
Dive into the world of break-even analysis and cost-volume-profit formulas to analyze business profitability. Learn about breakeven revenue, contribution/sales ratio, weighted average C/S ratio, and more through practical examples. Explore the significance of break-even charts and profit-volume charts in making informed financial decisions.
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Presentation Transcript
11 Session Break-Even Analysis
Chapter Content Break-Even Analysis Multi- product Formulae Limitations
Breakeven Revenue: C/S Ratio Contribution/Unit Sales Price/Unit Total Contribution Total Sales Revenue C/S Ratio = = Fixed Costs C/S Ratio BEP(In $) = Margin of safety = Budgeted level of activity Breakeven level of activity Budgeted Level of Activity Breakeven level of activity Margin of safety (%) = 100% Budgeted level of activity
Example.. A break down of KP's profit in the last accounting period showed the following: $000 Sales 450 Variable costs (220) Fixed costs (160) Profit 70 Due to a downturn in market conditions the company is worried that next year may result in losses and would like to know the change in sales that would make this happen. Required: The percentage fall in sales that would be necessary before the company would begin to incur losses is ____% (work to two decimal places).
Multi-Product CVP Formulae Fixed Costs BE Point (Revenue) = C/S Ratio Weighted Average C/S Ratio Fixed Costs + Required Profit Required Revenue = Weighted Average C/S Ratio
Example.. Weighted average C/S ratio A company sells three different levels of TV maintenance contract to its customers: Basic, Standard and Advanced. Selling prices, unit costs and monthly sales are as follows: Selling price Variable cost Monthly contracts sold Basic 50 30 750 Standard 100 50 450 Advanced 135 65 300 (a) Calculate the average contribution to sales ratio of the company based on the sales mix stated above. (b) Calculate the average contribution to sales ratio of the company if the total number of monthly contracts sold remains the same, but equal numbers of each contract are sold.
Limitations of CVP Analysis Linearity of total cost and total revenue All costs can be divided into fixed and variable elements Efficiency and productivity are unchanged The sales mix is maintained as total volume changes Constant price Constant variable cost per unit Constant contribution Constant fixed costs
