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BASICS OF CVP ANALYSIS IN

FINANCIAL ANALYSIS

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
www.afterschoool.tk
mobile : 91+9414430763

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WHAT IS CVP??

C=COST,V=VOLUME,P=PROFIT
THERE IS RELATION BETWEEN THESE,
THIS RELATION IS IDENTIFIED IN CVP
ANALYSIS

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WHAT IS BEP?

B=BREAK
E=EVEN
P=PROFIT
the point where there is no profit no loss

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WHAT IS BEP?

There are two formula :


BEP (in units) = fixed cost / contribution per
unit
BEP (in value) = fixed cost / PV ratio

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What is fixed cost?
The cost which will remain same whether
production is 0 unit or 100 units or 10000
units. Thus this cost has no relation to
production volume.
Example : if you produce 100 units, your cost
of material consumption is Rs. 1000, if you
make 1000 units it is 10000, but the rent paid
for the office remains the same, Rs. 3000 thus
rent is fixed but material is variable cost.
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What is variable cost?

As we discussed earlier : the cost which varies


directly with volume is called variable cost.
Material cost, labour cost, power cost, etc. Are
variable cost. If production will increase, these
costs will also increase

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Examples of fixed cost...

Rent, salary, office expenses, interest on loan,


etc.

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Examples of variable expenditure

Raw material
wages
power
carriage inward / outward
sales commission

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What is CONTRIBUTION?

Difference of sales price per unit and variable


cost per unit is called contribution per unit.
Suppose sales price per unit is 10, variable cost
per unit is 6, contribution per unit is 4.
thus contribution has two components in it =
fixed cost + profit

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What is PV ratio

Contribution as % of sales is called PV ratio


contribution is 4, sales price is 10, thus PV
ratio is 40%

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What is target profit pricing?

Here you keep the target profit in mind and


price the goods accordingly, so you have to
keep the target profit along with fixed cost in
all your calculations

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What is target profit volume?

It's formula is : (fixed cost + targe profit ) /


contribution per unit

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What is margin of safety?

How safe you are ?


It is the difference of your present sales to the
BEP level. If you are well above BEP level,
you are safe. Thus it is measured by
comparison to BEP level.
Its formula : (sales – BEP) / sales * 100

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Example of margin of safety :

Your BEP sales is 40000, your present sales is


100000
margin of safety = 60000
margin of safety in % = 60%

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Find BEP ?
Depreciation = 200,material cost = 500,labour
cost = 100, rent = 200, interest = 200, other
expenses = 100, sales = 2000, no. Of units =
100
here fixed cost = (rent 200, interest 200, other
exp. 100) = 500
variable cost per unit = (500+100)/100 =6
contribution = 20-6, BEP = 500/14=35.7

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Price=10, variable works cost =5.5,
variable selling cost =1.5,fixed works
cost=2.7 lakh, fixed selling cost = 1.26
lakh, what should be the sales to earn
10% on sales?

Contribution = 3, pv ratio=30%
let sales = x
x=3.96 lakh+.1x+.7x
.2x=3.96 lakh, or x= 19.8 lakhs. Answer

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Explanation

Sale s= variable cost + contribution


contribution = fixed cost + profit
here fixed cost is given and profit is given as %
of sales, thus we can write profit as .1X,
variable cost is 70% of sales price, so we can
write it as .7X answer

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Sales : 11.5 lakh, price 11.5 per unit, fixed
exp.=2 lakh, variable cost =7.5 per unit,
selling price is to be reduced to 11, profit
should be same, what should be the sales?

Contribution = 4 lakh & profit=contribution-


fixed cost, so Earlier profit =2 lakh
Sales = x,
x=2lakh(fixed cost) +2lakh(profit)+.68X
(variable cost)

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continued...

.32x = 4 lakhs
X = 12.5 lakhs. Answer
at this sales, the company will earn same profit

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Fixed cost=20 lakhs, sales=5 lakh
unit, variable cost=20 per
unit,profit=25% on cost, what is
BEP?
COST = FIXED + VARIABLE
=20+100 = 120 LAKH
PROFIT = 30 LAKHS
SALES = 150 LAKHS, SELLING PRICE = 30 PER
UNIT, CONTRIBUTION=10
BEP=20LAKH/10=2LAKH UNITS
PV RATIO 10/30*100 = 33%

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In the previous question, what
will be the effect, if selling price
is reduced by 20%?

New selling price = 30-6 = 24, new


contribution = 6, new BEP = 20lakh / 6=3.33
lakhs
new PV ratio= 6/24*100 = 25% answer

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Sales 3.2 lakh, fixed cost 66000, variable
cost=62% of sales, now fixed cost will increase
by 32000, sales will increase to 4.6 lakhs, what
is new BEP, and what should be the sales to
get profit of 55600?
New contribution = 4.6 *38%= 1.748 lakhs
PV ratio = 38%
BEP = fixed cost / PV ratio
=98000/38% = 2.578 lakh
sales at profit of 55600:
(98000+55600)/38%=4.042 lakh
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sales=30lakh,variable cost=21
lakh,profit=1.8 lakh, find BEP if
variable cost increases by 5%?
BEP=fixed cost / PV ratio
fixed cost =9-1.8=7.2
PV ratio=9/30*100=30%, present BEP=
7.2/30% = 24 lakhs.
New variable cost = 22.05, new PV ratio =
26.5%, new BEP= 27.1 lakhs answer
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In the previous question, what should be
the sales to maintain profit at present
level, but the selling price per unit is
reduced by 5%?

Selling price reduced = 28.5 lakh


PV ratio = (28.5-21)/28.5 *100 = 26.3%
desired sales = (fixed cost + profit)/PV ratio
=(7.2+1.8)/26.3% = 34.2 lakhs. Answer

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What is sunk cost?

The cost which has already been incurred is


ignored in all such calculations, it is called
sunk cost. (past cost – cost related to previous
years)

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What is opportunity cost?

It is the best opportunity forgone. It is not


taken into account in financial analysis.
However, it is taken into account in economic
analysis.

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Example
A toy manufacturer makes an average net profit of Rs. 2.50 per
piece on a selling price of Rs. 14.30 by producing and selling 60,000
pieces or 60% of the potential capacity. His cost of sales is: Direct
material Rs. 3.50 Direct wages Rs. 1.25
Works overhead Rs. 6.25 (50% fixed) Sales overhead Rs. 0.80
(25% variable) During the current year, he anticipates that his
works overhead will go up by 10%, while rates of direct material and
direct labour will increase by 6% and 8% respectively. But he has no
option of increasing the selling price. Under this situation he obtains
an offer for an order equal to 20% of his capacity. The concerned
customer is a special customer. What minimum price will you
recommend for acceptance to ensure the manufacturer an overall
profit of Rs. 1,67,300?
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solution

Sales (60000 * 14.5) =870000


material (60000*3.5*1.06)=222600
labour (60000*1.25*1.08)=81000
overheads (60000*6.25*1.1=412500
sales (60000*.8) = 48000
profit = 105900
profit left = 61400
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Target profit pricing
New variables costs : (3.5*1.06) = 3.71, labour
(1.25*1.08) = 1.35, overhead = (6.25*1.1*.5)=
3.43, sales overhead=.2
total variable cost =8.69
+ target profit 61400/20000 = 3.07
thus target price = 11.76
we have ignored other fixed cost, as it has
already been recovered in sale of 60000 routine
sales.
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