This is a technique used for planning short-term run profits by finding the relationship between profits and factors that influence profits. The following factors are taken to be influencing profits:- • Selling price
• Variable cost of production
• Fixed costs
• Activity level (production and sales units)
Profit planning is based on break-even analysis and can be worked out using either; a) Algebraic method
b) Contribution method
c) Break-even chart.
Accountants Model: Assumptions of Break-even Analysis:
a) The selling price will remain constant at all levels of sales units (using marginal costing) b) The fixed costs will not change at whatever level of activity c) The variable costs of production will remain constant for each unit. d) Costs and revenues will follow a linear trend.
e) Organizations produce only one type of product or various products at a constant mix. f) The only factor that affects costs and revenue is the production-volume. g) Technology and efficiency methods do not change.
h) Production level is equal to sales level i.e. all that is produced is sold hence no changes in stock levels.
Single product is assumed to be produced.
Limitations of Break-Even Analysis (Criticisms)
The limitations arise from the shortcoming of the assumptions given above. a) It is not true that the selling price will always remain constant at all levels of sales because to induce … sales is customary to lower the price. b) The costs of production per unit does not remain constant as at a certain stage, the costs fall per unit due to the learning curve effect and the economies of scale and may raise again later at diseconomies of scale. c) The economies today are dynamic leading to changes in technology of production and yet it has been assumed constant. d) There are fluctuations in production and did leading to changes in stock levels that are assumed to be constant. e) Its not easy to separate costs to variable and fixed elements f) Difficult to apply in a multi-product firm.
This is a graphic on the Cartesian plane showing costs and revenue on the Y-axis and activity level (output) on the X-axis. [pic]
The Break-Even Point (BEP) is that at which sales revenue (SR) equal total cost (TC) leading to normal profits (No losses, No gains). The left of the BEP, the organization makes losses and to the right of BEP, profits are realized. This seems to suggest that organizations make losses simply because of operating below BEP and improve on their profits by operating above BEP.
Margin of Safety (MOS): Is the difference between current operating activity level and the BEP. It’s preferable to express this as a percentage and can be measured using units or shillings. i.e. MOS = Current Activity – Break-even Activity x 100 in relative terms
MOS= current activity –break even quantity in absolute terms It measures the extent to which the sales should fall before the organization starts making losses. The higher the MOS, the safer the organization in times of a depression and the lower the MOS, the higher the risk the organization faces during depression.
ANGLE OF INCIDENCE:
Angle of Incidence: Is the angle between the sales revenue (SR) curve and the total cost (TC) curve measured from the break-even point (BEP). It is a measure of risk and the higher the angle, the higher the risk of the company and vice versa. Risk is a measure of fluctuations in profits or cash flows. During a boom, a company with a large angle of incident will be at a better position because its profits will increase faster but during a rescission, it suffers heavily because the profits decrease faster.
BREAK-EVEN POINT COMPUTATIONS. (illustrations)
Contribution per unit = Price – Variable cost per unit
Contribution / sales ratio (Profit-volume (pv) ratio)
...Cost, Volume, and ProfitCost-Volume-Profit (CVP) analysis is a managerial accounting tool that expresses the simplified relationship between cost, volume, and profit (or loss). CVP analysis is based on several factors and assumptions and uses a formula to express the relationship by equation or graphically and can be used with great effect by managers who understand the limitations of the analysis.
Cost-Volume-Profit (CVP) analysis is a managerial accounting tool that expresses the simplified relationship between cost, volume, and profit (or loss). CVP analysis focuses on how profits are affected by the following five factors: selling prices, sales volume, unit variable costs, total fixed costs, and mix of products sold. (Brewer, 2010, p. 258) Additionally, CVP analysis is based on several assumptions including, (a) selling price is constant and a change in sales volume is the only factor that affects costs, (b) costs and revenues are linear throughout relevant range, (c) costs can be divided into fixed and variable components throughout relevant range, (d) sales mix...
...fully understanding the total costs involved and the prices they can charge. As a result, they discover they can't sell enough of the product or service to make a profit. One of the most important tools you can use to make better business decisions is the break-even analysis; it enables you to determine with great accuracy whether or not your idea is a profitable one. Best of all, you can use this tool to evaluate every product or service you offer. The break- even point is the starting point for CVP analysis because before a company can earn profits; it must first cover all of its variable and fixed costs.
What is CVP?
Cost-volume-profitanalysis is a tool that can be utilized by business managers to make better business decisions. Among the tools in a business manager's decision-making arsenal, CVP analysis provides one of the more detailed and objective ways by which a manager can assess and even predict the course of business for the company and its employees. Another major benefit of CVP analysis is that it provides a detailed snapshot of company activity. This includes everything from the costs needed to produce a product to the amount of the product produced. This helps managers determine, very specifically, what the future will hold if variables are altered. For instance,...
...sales a company needs in order to make a profit. They care if the sales mix is accurate because if the sales mix is different, it because a completely different calculation.
B. The first financial model was not useful because it did not separate fixed and variable cost. That means a CVP analysis cannot be done. It separated costs into manufacturing and cost of goods sold which is not as useful as knowing whichcosts are fixed or variable.
C. If I were going to invest in RBC, I would make sure the sales mix is accurate. It is important because the variable cost of beer is only 15% of the beer sales while food and other is 33% and 35% respectively. If food sales are much higher the CM goes down and it results in the Break Even Point being much higher.
D. It is difficult to find out how much it costs for a pint of beer because it lists total beer sales without saying how many were sold. It is given as a total percentage of sales which means price or units cannot be figured out.
E. The Contribution Margin for the company is 822,212/1,953,000=.420999 Break even then would be Sales Dollars=Fixed Cost/CMR 520000/.420999=$1,235,156
Margin of Safety is Actual Sales-Breakeven Sales=MOS is 1,953,000-1,235,156=$717,844
The percentage is 717,844/1,953,000= 36.8%
RBC cannot find the breakeven point in units because there is no number of...
1) Cost-volume-profitanalysis is used primarily by management: A) as a planning tool B) for control purposes C) to prepare external financial statements D) to attain accurate financial results Answer: A Diff: 1 Terms: cost-volume-profit (CVP) Objective: 1 AACSB: Communication 2) One of the first steps to take when using CVP analysis to help make decisions is: A) finding out where the total costs line intersects with the total revenues line on a graph. B) identifying which costs are variable and which costs are fixed. C) calculation of the degree of operating leverage for the company. D) estimating how many products will have to be sold to make a decent profit. Answer: B Diff: 1 Terms: cost-volume-profit (CVP) analysis Objective: 1 AACSB: Reflective thinking 3) Cost-volume-profitanalysis assumes all of the following EXCEPT: A) all costs are variable or fixed B) units manufactured equal units sold C) total variable costs remain the same over the relevant range D) total fixed costs remain the same over the relevant range Answer: C Diff: 2 Terms: cost-volume-profit (CVP) Objective: 1 AACSB:...
BREAK-EVEN POINT ANALYSIS
LETTER OF SUBMISSION
Md. Aiyub Islam
Department of Accounting & Information Systems,
University of Chittagong.
Subject: Solicitation for acceptance of the Term Paper.
I have pleasure in forwarding my term paper on Break-even Point Analysis that have assigned me to prepare as the practical requirement of my BBA (4th Year) course under the Department of Accounting and Information Systems, C.U. During preparing my report, I have learnt many interesting things about the break-even analysis of manufacturing and service industry. I have tried my level best to be conclusive & terse while preparing the report. My intention was never directed to undermine anyone concerned.
I sincerely hope that you would be kind enough to accept my term paper for evaluation and thus oblige thereby.
Md. Mosharof Hossen
Class Roll: 08301048
Department of Accounting & Information Systems,
University of Chittagong.
Every company’s corporate managers have a goal of maximizing shareholder wealth. However, given that no obvious, single course of action leads to fulfillment of that goal, managers must choose speciﬁc course of action and develop plans and controls to pursue...
...understand the basis of the financial information provided by management accountants. We will explore both sides during our discussions.
The course is divided into three major parts. The first part covers fundamental concepts, including activity-based management, and provides an overview of managerial accounting. The second part discusses concepts and methods useful for managerial decision making, such as CVP and differential analysis. Finally, in the third part, we concentrate on planning and performance evaluation of business segments as they strive to execute the firm’s strategy. In this part, we also discuss measurement and incentives (compensation) of managers.
As indicated above, this is a case-based course to illustrate the applications of managerial accounting concepts in real-life situations. While preparing these cases, students should read about basic concepts on their own, using any of the textbooks mentioned later in this syllabus. However, I do intend lecturing on some of the relatively advanced topics (e. g. activity-based costing, variance analysis, pricing, target costing and allocations) at appropriate times during the quarter.
The course is general enough to benefit both MAcc and MBA students. A basic knowledge of financial and managerial accounting should suffice as a pre-requisite for the course. Both sets of students will enhance their understanding of Managerial Accounting topics by...
...A cost-volume-profitanalysis is a vital factor to a company. It is very important to profit planning. Cost-volume-profit (CVP) analysis is the study of the effects of changes in cost and volume on a company’s profits. It is also a factor in management decisions such as setting selling prices, determining product mix, and maximizing use of production facilities. There are five components that make up a CVP analysis. They are volume or level of activity, unit selling prices, variable cost per unit, total fixed costs, and sales mix. The CVP analysis considers the relationships that each of these components have with each other. A better understanding of what these components are will help set the basis of understanding how the CVP analysis works.
The volume or the level of activity is the current condition of the market and the company. It is a snapshot of what the sales look like. It tells if products are moving or if the business is dead in the water. Unit selling prices are the current selling prices of the products at that point of time. The variable costs per unit are the costs that vary in total directly and proportionately with changes in the activity level. The total fixed...
...The relationship between costvolume and profit is shown by cost-volume-profitanalysis. it is an analytical tool for analyzing the relationship among cost, price, profit, sales and production volume. Mainly there are three element in cost-volume-profitanalysis.
It is highly essential for the management to have the complete knowledge about the inter relationship among the cost, volume and profit. for this purpose cost-volume-profitanalysis can be regarded as a sophisticated method or analytical tool used in management.
Cost-volume-profit (CVP) analysis is one of the most powerful tools that managers at their command. It helps them understand the interrelationship between cost, volume, and profit in an organization by focusing on interaction among the following five elements;
1. prices of products
2. volume or level of activity
3. per unit variable costs
4. total fixed costs
5. mix of products sold
Because CVP analysis helps managers understand the interrelationships among...