Download - Cvp Analysis - Summer 2012
-
7/29/2019 Cvp Analysis - Summer 2012
1/22
Example No.1:
Total Per unit
Sale (400 Speakers) 100,000 250
Less: Variable Cost (60,000) (150)
Contribution Margin 40,000 100
Less: Fixed Cost (35,000)Net Operating Income 5,000
Explaination of change in activity affect Contribution Margin & Net Operating Income:
On Sale of 1 Speaker:
Total Per unit
Sale (1 Speaker) 250 250
Less: Variable Cost (150) (150)
Contribution Margin 100 100
Less: Fixed Cost (35,000)
Net Operating Loss (34,900)
On Sale of 2 Speakers:
Total Per unit
Sale (2 Speakers) 500 250
Less: Variable Cost (300) (150)
Contribution Margin 200 100
Less: Fixed Cost (35,000)
Net Operating Loss (34,800)
On Sale of 350 Speakers:
-
7/29/2019 Cvp Analysis - Summer 2012
2/22
Total Per unit
Sale (350 Speakers) 87,500 250
Less: Variable Cost (52,500) (150)
Contribution Margin 35,000 100
Less: Fixed Cost (35,000)
Net Operating Income -
On Sale of 351 Speakers:
Total Per unit
Sale (351 Speakers) 87,750 250
Less: Variable Cost (52,650) (150)
Contribution Margin 35,100 100
Less: Fixed Cost (35,000)
Net Operating Income 100
Rule:
Change in Income:
1. Change in Income = Change in Sales - (in units) x C.Margin per unit
2. Change in Income = Change in Sales - (in amount) x C.Margin ratio
New Income = Previous income + change in income
C. Margin ratio = C.Margin x 100
Net Sales
-
7/29/2019 Cvp Analysis - Summer 2012
3/22
Increased in numbers of speakers sold 25Contribution margin per speaker x $ 100
Increase in Net Operating Income 2,500
CONTRIBUTION MARGIN RATIO:
C. M. Ratio = 40,000
100,000
Or: C. M. Ratio = 100250
Impact on Net Operating Income on changes in Sales, by C.M. ratio:
Calculation of changes in net income, with the changes in sales, without I/S
Increase in Sales 30,000
C.M. ratio 40%
Increase in Net operating Income 12,000
Proof: Present Expected Changes Percentage
Sales 100,000 130,000 30,000 100%
Less: Variable Cost (60,000) (78,000) (18,000) 60%
Contribution Margin 40,000 52,000 12,000 40%
Less: Fixed Cost (35,000) (35,000) -
Net Operating Income 5,000 17,000 12,000
Some Applications of CVP Analysis:
Concept No.1: (Change in Fixed Cost and Sales Volume):
Sales manager feels that by increase in $10,000 fixed cost i.e, advertising budget,
TotalContribution Margin
Total Sales
Contribution Margin Per unitSales price Per unit
-
7/29/2019 Cvp Analysis - Summer 2012
4/22
then the sale will increase by $30,000 to a total 520 units. Should the advertising
budget increase,
1 Total method:
A Expected C. Margin ($130,000 x 40%) 52,000
Current C. Margin ($100,000 x 40%) 40,000Increase in Contribution margin 12,000 Benefit
Increase in Fixed Cost 10,000 Cost
2,000 Net Benefit
B Expected C. Margin (520 units x $100) 52,000
Current C. Margin (400 units x $100) 40,000
Increase in Contribution margin 12,000
Increase in Fixed Cost 10,000
2,000
2 Incremental method: - This method will applied ONLY when there is NO change
in Contribution margin:
A Increase in Contribution margin
($30,000 x 40%) 12,000
Increase in Fixed Cost 10,000
2,000
B Increase in Contribution margin
(120 units x $ 100) 12,000
Increase in Fixed Cost 10,000
2,000
Concept No.2: (Change in Variable Cost and Sales Volume):
Management consider to change the part with more high quality part.
This will increase the variable cost by $10 which decrease the
contribution margin by $ 10. It increases the sales to 480 speakers.
Increase in Profit
Increase in Profit
Increase in Profit
Increase in Profit
-
7/29/2019 Cvp Analysis - Summer 2012
5/22
Should this changes incorporated:
1 Total method:
A Expected C. Margin (480 x $250 = $120,000 x 36%) 43,200
Current C. Margin ($100,000 x 40%) 40,000Increase in Contribution margin 3,200
3,200
B Expected C. Margin (480 units x $90) 43,200
Current C. Margin (400 units x $100) 40,000
Increase in Contribution margin 3,200
3,200
Concept No.3: (Change in Fixed Cost, Sales Price and Sales Volume):
Assumption:
Management consider to cut the selling price by $20 per speaker,
increases fixed cost by $15,000 in advertising budget per month,
these changes increases the sales by 50% i.e. 600 speakers.
Should this changes incorporated:
1 Total method:
A Expected C. Margin (600 x $230 = $ 138,000 x 34.78%) 48,000
Current C. Margin ($100,000 x 40%) 40,000
Increase in Contribution margin 8,000
Increase in Fixed cost 15,000
Decrease in income (7,000)
B Expected C. Margin (600 speakers x $ 80) 48,000
Current C. Margin (400 speakers x $100) 40,000
Increase in Contribution margin 8,000
Increase in Fixed Cost 15,000
(7,000)Decrease in income
Increase in Profit
Increase in Profit
-
7/29/2019 Cvp Analysis - Summer 2012
6/22
Concept No.4: (Change in Variable Cost, Fixed Cost and Sales Volume):
Assumption:
Management decided to pay $15 per speaker commission toSales person and stop payment of $6,000 fixed amount of
salaries, this change will increase the monthly sales by 15%
i.e. to 400 speakers to 460 speakers per month.
Should this changes incorporated:
Total method:A Expected C. Margin (460 speakers x $250 = $ 115,000 x 34%) 39,100
Current C. Margin ($100,000 x 40%) 40,000
Decrease in Contribution margin 900
Decrease in Fixed cost 6,000
Increase in income 5,100
B Expected C. Margin (460 speakers x $85) 39,100
Current C. Margin (400 speakers x $100) 40,000
Decrease in Contribution margin 900
Decrease in Fixed cost 6,000
Increase in income 5,100
Example 1:
Company plan to reduce the sales price per unit by 10%, as a result of this
sales increase to 25%. Company also replace the part with more quality part
which increase the cost to $170. Company also increase in fixed cost of $5,000
on advertisement. Evaluate the proposal
1 Sales 225 2 Increase in sale
V. Cost (170)
CM 55
24.44% 3 Increase in fixed cost
-
7/29/2019 Cvp Analysis - Summer 2012
7/22
Total method:A Expected C. Margin ($112,500 x 24.44%) 27,000
Current C. Margin ($100,000 x 40%) 40,000
Decrease in Contribution margin 13,000
Increase in Fixed cost 5,000
Decrease in Income 18,000
B Expected C. Margin (500 speakers x $55) 27,500
Current C. Margin (400 speakers x $100) 40,000
Decrease in Contribution margin 12,500
Increase in Fixed cost 5,000
Decrease in Income 17,500
-
7/29/2019 Cvp Analysis - Summer 2012
8/22
-
7/29/2019 Cvp Analysis - Summer 2012
9/22
-
7/29/2019 Cvp Analysis - Summer 2012
10/22
40%
40%
-
7/29/2019 Cvp Analysis - Summer 2012
11/22
-
7/29/2019 Cvp Analysis - Summer 2012
12/22
-
7/29/2019 Cvp Analysis - Summer 2012
13/22
Loss
Benefit
Loss
Benefit
112,500
500
5,000
-
7/29/2019 Cvp Analysis - Summer 2012
14/22
Loss
Loss
Loss
-
7/29/2019 Cvp Analysis - Summer 2012
15/22
Break even Analysis:
1 Computation of Break even analysis by Equation method:
Break even point (in amount)
Sale = Variable cost + Fixed Cost + Desired Profit
Computation of Break even analysis by Formula:
Break even point (in amount) =
Break even point (in units) =
Target Profit Analysis:
It is also done by break even analysis (equation method)
Margin of Safety:
Margin of safety is the excess of budgeted (or actual) sales over the break even sales.
BEP provided the line below which company suffered loss. Higher the margin of safety, the
lower the risk of not breaking even.
Margin of Safety = Total Sales (actual) - Break even sales
Margin of Safety (in Percentage) = Margin of Safety (in amount)
Actual Sales
MOS = $100,000 - $87,500 $ 12,500
MOS (%) = 12.5%$ 12,500
$100,000
Fixed Cost
C.M. Ratio
Fixed Cost
C.M. per unit
-
7/29/2019 Cvp Analysis - Summer 2012
16/22
Operating Leverage:
It is a measure of how sensitive net operating income is to percentage changes in sales.
It means that if operating leverage is high then the small percentage change can produce
large increasein net income and vice versa.
Farm A Farm B
Sales 100,000 100,000
Less: Variable cost (60,000) (30,000)
40,000 70,000
Less: Fixed Cost (30,000) (60,000)
Net Operating Income 10,000 10,000
Degree of operating leverage = Contribution Margin
Net operating Income
DOL (A)= 40,000 4 times
10,000
DOL (B)= 70,000 7 times
10,000
10%
Sales 100,000 110,000 100,000
Less: Variable cost (60,000) (66,000) (30,000)
Contribution Margin 40,000 44,000 70,000Less: Fixed Cost (30,000) (30,000) (60,000)
Net Operating Income 10,000 14,000 10,000
Change in Net Operating Income (in amount) 4,000
Change in Net Operating Income (in times) 4,000
Farm A Far
Contribution Margin
-
7/29/2019 Cvp Analysis - Summer 2012
17/22
10,000
Changes in Percentage 40
Decrease in Sale by 8%
Farm A = 8% x 4 times = 32% decrease in income
Farm B = 8% x 7 times = 56% decrease in income
Sales 100,000 92,000 100,000
Less: Variable cost (60,000) (55,200) (30,000)
Contribution Margin 40,000 36,800 70,000
Less: Fixed Cost (30,000) (30,000) (60,000)
Net Operating Income 10,000 6,800 10,000
Change in Net Operating Income (in amount) (3,200)
Change in Net Operating Income (in times) (3,200)
10,000
Changes in Percentage (32)
Farm A Far
-
7/29/2019 Cvp Analysis - Summer 2012
18/22
-
7/29/2019 Cvp Analysis - Summer 2012
19/22
10%
110,000
(33,000)
77,000(60,000)
17,000
7,000
7,000
B
-
7/29/2019 Cvp Analysis - Summer 2012
20/22
10,000
70
92,000
(27,600)
64,400
(60,000)
4,400
(5,600)
(5,600)
10,000
(56)
B
-
7/29/2019 Cvp Analysis - Summer 2012
21/22
-
7/29/2019 Cvp Analysis - Summer 2012
22/22
c Verify your answer through Income Statement.
7 In an effort to increase the sales and profit, management is considering the use of
a higher quality speaker. The higher quality speaker would increase the variable cost
by $3 per unit, but management could eliminate one quality inspector who is paid a
salary of #30,000 per year. The sales manager estimate that the higher quality speaker
would increase annual sales by atleast 20%.
Total method:A Expected C. Margin (1,200,000 x 120% =$ 1,440,000 x 20%) 288,000
Current C. Margin (1,200,000 x 25%) 300,000
Decrease in Contribution margin 12,000
Decrease in Fixed cost 30,000
Increase in income 18,000
B Expected C. Margin (20,000 x 120% = 24,000 x $12) 288,000
Current C. Margin (20,000 x $15) 300,000
Decrease in Contribution margin 12,000
Decrease in Fixed cost 30,000
Increase in income 18,000
a) Assuming that chanes are made as described above, prepare projected
income statement for next year. Show a data on a total, per unit and percentage basis.
b) Compute the company's new breakeven point in both units and dollar of sales.
Use C.M method.
c) Would you recommend that the change be made?