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The cost volume profit analysis (CVPA) is also known as breakeven analysis.<\/span><\/p>\n CVPA determines the\u00a0breakeven point\u00a0for different\u00a0sales\u00a0volumes and cost structures. <\/span><\/p>\n It can be useful for managers for making short-term business decisions. <\/span><\/p>\n \u00a0<\/span><\/p>\n CVPA makes several assumptions; sales price,\u00a0fixed cost and variable cost\u00a0per unit are constant in CVPA. <\/span><\/p>\n CVPA also manages contribution margin. <\/span><\/p>\n The contribution margin is the difference between total sales and total variable costs. <\/span><\/p>\n The main motive of the business is to earn the profits.<\/span><\/p>\n For profit, the contribution margin must be exceed to total fixed costs. <\/span><\/p>\n The contribution margin may also be calculated per unit. <\/span><\/p>\n \u00a0<\/span><\/p>\n Under the cost volume profit analysis, we will study the following:<\/strong><\/span><\/p>\n Contribution margin<\/span><\/p>\n Profit volume ratio, contribution margin ratio<\/span><\/p>\n Determination of selling price, selling price per unit<\/span><\/p>\n Profit calculation at different bases, realize profit<\/span><\/p>\n Determination of profit from sales volume, budgeted sales volume<\/span><\/p>\n Determination of profit on selling price<\/span><\/p>\n Determination of profit on cost price<\/span><\/p>\n Profit on margin of safety<\/span><\/p>\n Cost volume ratio<\/span><\/p>\n <\/p>\n <\/p>\n Under the break-even point analysis, we will study the following:<\/strong><\/span><\/p>\n Break-even analysis under changed situation<\/span><\/p>\n Margin of safety<\/span><\/p>\n Required sales for desired profit<\/span><\/p>\n Cash break-even point<\/span><\/p>\n Application of marginal costing<\/span><\/p>\n \u00a0<\/strong><\/p>\n <\/p>\n Contribution means giving or donation. <\/span><\/p>\n Here, contribution means to leave sometime for some purpose. <\/span><\/p>\n Margin means profit. <\/span><\/p>\n Therefore, contribution margin is the excess amount of sales revenue over variable cost; in other words:<\/span><\/p>\n \u00a0<\/span><\/p>\n Contribution = Sales \u2013 Variable cost<\/span><\/b><\/p>\n \u00a0<\/span><\/p>\n The main objective of contribution margin is to recover first fixed cost then remaining amount transfers toward profit. <\/span><\/p>\n If the contribution margin is not sufficient to cover fixed cost, then a loss occurs for the period. <\/span><\/p>\n There are two methods to calculate contribution margin. <\/span><\/p>\n First is unit basis and second is amount basis.<\/span><\/p>\n \u00a0<\/span><\/p>\n Formula of contribution margin on unit basis:<\/span><\/b><\/p>\n Contribution margin per unit \u00a0\u00a0\u00a0 = SPPU \u2013 VCPU <\/span><\/p>\n Contribution margin (in unit)\u00a0\u00a0\u00a0\u00a0 = Sales units x Contribution margin per unit<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/p>\n <\/p>\n Contribution margin<\/span><\/em><\/span><\/b><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/span><\/b><\/p>\n For 2,000 units <\/span><\/p>\n Particulars <\/span><\/p>\n<\/td>\n Per Unit<\/span><\/p>\n<\/td>\n Amount<\/span><\/p>\n<\/td>\n<\/tr>\n Sales revenue <\/span><\/p>\n<\/td>\n 250<\/span><\/p>\n<\/td>\n 500,000<\/span><\/p>\n<\/td>\n<\/tr>\n Less: Variable cost <\/span><\/p>\n<\/td>\n 150<\/span><\/p>\n<\/td>\n 300,000<\/span><\/p>\n<\/td>\n<\/tr>\n \u00a0Contribution<\/span><\/p>\n<\/td>\n 100<\/span><\/p>\n<\/td>\n 200,000<\/span><\/p>\n<\/td>\n<\/tr>\n Less: Fixed cost <\/span><\/p>\n<\/td>\n \u00a0<\/span><\/p>\n<\/td>\n 100,000<\/span><\/p>\n<\/td>\n<\/tr>\n Earnings before interest and tax (EBIT)<\/span><\/p>\n<\/td>\n \u00a0<\/span><\/p>\n<\/td>\n 100,000<\/span><\/p>\n<\/td>\n<\/tr>\n Less: Interest <\/span><\/p>\n<\/td>\n \u00a0<\/span><\/p>\n<\/td>\n 10,000<\/span><\/p>\n<\/td>\n<\/tr>\n Earning before tax (EBT)<\/span><\/p>\n<\/td>\n \u00a0<\/span><\/p>\n<\/td>\n 90,000<\/span><\/p>\n<\/td>\n<\/tr>\n Less: Tax @ 25% (90,000 @ 25%)<\/span><\/p>\n<\/td>\n \u00a0<\/span><\/p>\n<\/td>\n 22,500<\/span><\/p>\n<\/td>\n<\/tr>\n Earning after tax (EAT)<\/span><\/p>\n<\/td>\n \u00a0<\/span><\/p>\n<\/td>\n $67,500<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n Contribution margin (in amount)<\/span><\/p>\n<\/td>\n = Sales in amount x P\/V ratio<\/span><\/p>\n<\/td>\n<\/tr>\n Or <\/span><\/p>\n<\/td>\n = Sales revenue \u2013 Variable cost<\/span><\/p>\n<\/td>\n<\/tr>\n Or <\/span><\/p>\n<\/td>\n = Fixed cost + Profit \u2013 Loss<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n PROBLEM: 1A<\/span><\/b><\/p>\n The extracted data of XYZ Company is given below: <\/span><\/p>\n Selling price per unit \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $50<\/span><\/p>\n<\/td>\n Fixed cost \u00a0\u00a0\u00a0 $140,000<\/span><\/p>\n<\/td>\n<\/tr>\n Variable cost per unit \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $30<\/span><\/p>\n<\/td>\n Sales units \u00a0\u00a0 15,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Required: (1) Contribution margin per unit; (2) Contribution margin in rupees; (3) Profit for the period<\/span><\/p>\n [Answer: (1) CMPU = $20; (2) CM = $300,000; (3) $160,000]<\/span><\/i><\/p>\n SOLUTION: <\/span><\/b><\/p>\n Contribution margin per unit (CMPU)<\/span><\/b><\/p>\n = SPPU \u2013 VCPU <\/span><\/p>\n = 50 \u2013 30<\/span><\/p>\n = $20<\/span><\/p>\n \u00a0<\/span><\/p>\n Contribution margin is rupees<\/span><\/b><\/p>\n Sales amount \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 15,000 units x $50\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 750,000<\/span><\/i><\/p>\n Variable cost \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 15,000 units x 30\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 450,000<\/span><\/i><\/p>\n P\/V Ratio \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = CMPU \u00f7 SPPU \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 20 \u00f7 50 \u00a0\u00a0\u00a0\u00a0 = 0.4 or 40% <\/span><\/i><\/p>\n \u00a0<\/span><\/p>\n Now, Contribution margin \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n = Sales revenue \u2013 Variable cost <\/span><\/p>\n = 750,000 \u2013 450,000<\/span><\/p>\n = $300,000<\/span><\/p>\n \u00a0<\/span><\/i><\/b><\/p>\n Alternative,<\/span><\/i>Contribution Margin <\/span><\/b><\/b><\/h3>\n
Income Statement<\/span><\/b><\/h3>\n
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