f fin analysys class 3&4

7/31/2019 F Fin Analysys Class 3&4

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FINANCIAL ANALYSIS

CLASS 3 & 4


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SESSION PLAN

COST-VOLUME-PROFIT ANALYSIS

BREAK-EVEN ANALYSIS


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The cost-volume-profit (CVP) analysis is a tool to showthe relationship between various ingredients of profit

planning, namely

1. Unit sales price (SP)

2. Unit variable cost (VC)

3. Fixed costs (FC)

4. Sales volume, and

5. Sales-mix (in the case of multi-product firms).

CVP ANALYSIS


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The crucial step in CVP analysis is the determination

of the break-even point (BEP)

BEP is defined as the sales level at which the totalrevenues equal total costs.

It is the level at which losses cease and beyondwhich profit starts.


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Contribution Margin (CM) ApproachExample 1: How many ice-creams, having a unit cost of Rs

2 and a selling price of Rs 3, must a vendor sell in a fair torecover the Rs 800 fees paid by him for getting a selling

stall and additional cost of Rs 400 to install the stall?

Contribution Margin (CM) = Sales Price Unit Variable cost

BEP (units) = Fixed Costs / CM per unit

BEP (units) = (800 + 400) / (3 2) = 1200 / 1 = 1200 units

BEP (amount or sales revenue) = BESR = BEP(units) x Sales

price per unit = 1200 units x 3/- per unit = Rs 3600/-


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CONTINUED

Profit to Volume (P/V) Ratio=CM(unit) / SP(unit)= 1/3 = 33.33%

BEP (amount) is also given by = Fixed Cost / PV ratio= 1200 / 1/3 = 3600/-

VC to Sales Volume (V/V) ratio = 1 P/V ratio = 1 1/3 = 2/3

= 66.67%

Or P/V ratio + V/V ratio always equals 1 or 100 %


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MARGIN OF SAFETYMargin of safety = excess of actual sales revenue (ASR)

(MS) over break-even sales revenue (BESR)= ASR BESR

MS Ratio = (ASR-BESR) / ASR = MS(amount) / ASR

If in the vendors case, actual sales is 2,000 units (Rs 6,000)

MS (units) = 2000 1200 = 800 units

MS (amount) = Rs 6,000 Rs 3,600 = Rs 2,400

& the MS ratio is Rs 2,400 Rs 6,000 = 40 per cent.


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PROFITThe amount of profit can also be directly determined withreference to the margin of safety and P/V ratio as follows :-

Profit = MS(amount) x PV Ratio , or

Profit = MS(units) x CM per unit

In the vendors case, profit = Rs 2,400 33.33 % = Rs 800

or 800 Re 1 = Rs 800

This is because once the total amount of fixed costs has

been recovered, profits will be the difference of additionalsales revenue (ie MS) and variable costs.


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SALES REVENUE FORDESIRED PROFIT

BEP(amount) = FC / PV ratiowhich means that BESR covers total FC & Profit is zero.

So sales revenue for a desired profit level will be :-

(Desired profit + FC) / PV ratio

If in the vendors case, desired profit is Rs 1000/- , he willneed a sales revenue of (1000 + 1200) / 33.33% = Rs6600/-

or 2200 units @ Rs 3/- each


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Break-Even Applications

Move to Excel Sheet


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1.C-V-P Analysis2.Break Even Point3.Contribution Margin

4.Margin of Safety5.Profit calculations6.Revenues for desired profits


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1.Changes in Financial Position

2. Understanding Non Cash Expenses

3. Understanding Cash Flow Concepts

4. Preparation of Cash flow statements


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f fin analysys class 3&4

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