Topic A2 - CVP Analysis (Cost - Volume - Profit )

 Monthly Contribution Income Statement

Table

• Sales ( number of items = 500 items)
• Less Variable cost
• Contribution Cost (Bien loi nhuan)
• Less Fixed cost
• Net operation income

=>

Sales per unit = Sales / 500

Lest VC per unit = VC /500

CM per unit = CM / 500 or Sales per unit - VC per unit

=>  break-even point = total fix cost / CM per unit

=> Profit = ( Sales items - break- even point ) * CM per unit

or we can calculate by below formula

Profit = (Sales – Variable expenses) – Fixed expenses
=> Profit = (P × Q – V × Q) – Fixed expenses 

Profit = (P – V) × Q – Fixed expenses
Profit = Unit CM × Q – Fixed expenses  

P : selling price per unit

Q: Quantity

V : variable cost per unit

Contribution Margin Ratio (CM Ratio)  

CM ratio = total CM / total sales = unit CM x Q / P x Q

=> CM ratio = unit CM / price (bien khong doi)

When sales increases => CM increase = sale increase * CM ratio

The same for Variable expense ratio

Deliverable

 1. Changes in Fixed Costs and Sales Volume:

What is the profit impact if Racing Bicycle can increase unit sales from 500 to 540 (SV) by increasing the monthly advertising budget by $10,000 (FC)?  

Ans: 

Increase in CM = number of items increase multiply by CM per unit = (40 units X $200) = $ 8,000
Increase in advertising expenses 10,000
Decrease in net operating income $ (2,000)  

2. Change in Variable Costs and Sales Volume

What is the profit impact if Racing Bicycle can use higher quality raw materials, thus increasing
variable costs per unit by $10 (VC), to generate an increase in unit sales from 500 to 580 (SV)? 

Ans: by Table

• Sales ( number of items = 500 items)
• Less Variable cost
• Contribution Cost (Bien loi nhuan)
• Less Fixed cost
• Net operation income

3. Change in Fixed Cost, Sales Price and Volume  

What is the profit impact if : (1) cuts its selling price $20 per unit (SP), (2) increases its advertising budget by $15,000 per month (FC), and (3) increases sales from 500 to 650 units per month (SV)?

Ans: by Table

4. Change in Variable Cost, Fixed Cost and Sales Volume

What is the profit impact if : (1) pays a $15 (VC) sales commission per bike sold instead of paying
salespersons flat salaries that currently total $6,000 per month (FC), and (2) increases unit sales from 500 to 575 bikes (SL)?  

Ans: by Table

5. Change in Regular Sales Price - bang hang si - khong anh huong den tien do san xuat

If has an opportunity to sell 150 bikes (SV) to a wholesaler without disturbing sales to other customers or fixed expenses, what price would it quote to the wholesaler if it wants to increase monthly profits by $3,000 (P)?

Ans:

Increase profits per units = 3000 / 150 = $ 20 per bike

Variable cost per bike = $ 300 (van la so cu)

=> Selling price required = sum above = $ 320

Chung minh:

=> Total Sales =  150 bikes × $320 per bike = $ 48,000
=> Total variable costs = 150 bikes x $ 300 =  $ 45,000

CM = $ 3000

Total Fixed cost = 0
=> Increase in net operating income = $ 3,000  

6. Target Profit Analysis

Suppose Racing Bicycle management wants to know how many bikes must be sold to earn a target profit of $100,000.

Unit sales to attain the target profit  = Total CM / CM per units = ( target profit + fixed cost ) / CM per units = ( $100000 + $ 80000 ) / $ 200 = 900.

Target Profit Analysis in Terms of Dollar Sales  = 900 * Selling price = 900 * 500 = $ 450000 

or 

Dollars sales to attain the target profit  = Total CM / CM ratio = ( target profit + fixed cost ) / CM ratio = ( $100000 + $ 80000 ) / 40% = 450000.

Break-even Analysis  

Unit sales to break even  = Fixed expenses / CM per unit = $80,000 / $ 200 = 400

Dollar sales to break even  = Fixed expenses / CM ratio = 400 * 500 = 200000

=> The Margin of Safety in Dollars  = Total sales - Break-even sales 

For ex: If we assume that RBC has actual sales of $250,000, given that we have already determined the break-even sales to be $200,000, the margin of safety is $50,000 as shown.

The Margin of Safety Percentage = 50000/ 250000 = 20%

=> The Margin of Safety in units = margin of safety  /price = 50000 / 500 = 100

Operating Leverage  

Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits.  

DOL = Degree of Operating Leverage  = CM / Net Income (before tax) = 100,000 / 20000 = 5

=> With an operating leverage of 5, if RBC increases its sales by 10%, net income (profit) would increase by 50%.  

=> High Operating Leverage ratio

►signals the existence of high fixed costs.►increases risk of making loss in adverse market conditions.►increases opportunity to make profit when higher demand exists.