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1、Cost Management Systems Lecture 4,Cost-Volume-Profit Analysis,Cost Management Systems 22321,University of Technology, Sydney,Cost Management Systems 22321,University of Technology, Sydney,Lecture Outline,Introduction What is CVP?Assumptions of CVPBasic CVP ModelThe Contribution ConceptThe Breakeven
2、PointMargin of SafetyTaxation EffectsMulti-product DecisionsApplications of CVPLecture Demonstration Problem,Cost Management Systems 22321,University of Technology, Sydney,Introduction,Successful management requires the understanding the relations among revenues, costs, volume, and profits. The cost
3、 volume profit model represents the firms activities because virtually all decisions affect these items.Cost volume profit analysis involves an examination of cost and revenue behavioural patterns and their relationships with profit. The analysis separates costs into fixed and variable components an
4、d determines the level of activity where costs and revenues are equal. The cost volume profit analysis is a quantitative model used for analysing the relationships between the cost, revenue and profit structures of a firm. It is a key factor in decisions based on selling prices, variable costs and f
5、ixed costs. Fixed asset acquisitions, resource utilisation and disposal, product mix determination and product pricing are decision areas in which an understanding of cost volume profit relationships help guide the firm to the achievement of its predetermined objectives.,Cost Management Systems 2232
6、1,University of Technology, Sydney,Assumptions of CVP,For a CVP analysis to be valid, the following assumptions must be upheld:Costs can be separated into fixed and variable categoriesFixed costs are constant across changes in volume, while variable costs are in direct proportion to volumeThe revenu
7、e line is linear (i.e. uniform selling price)All production is sold, or no significant changes in inventory levelsProduction technology, market conditions, management policies etc. do not change over the periodConstant contribution margin (or a constant average contribution margin for multi-product
8、firms)The sales mix remains the same over the period for multi-product firms,Cost Management Systems 22321,University of Technology, Sydney,Basic CVP Model,The CVP model specifies a relation among selling prices, unit costs, volume sold and profits. It starts with the basic equation relating profits
9、 to revenues less costs.Where: TR = Total revenue for the periodTC = Total cost for the periodProfit = Net operation profit before taxThe above equation can be further broken down into the following components:Where: P = Unit selling priceF = Total fixed cost in periodV = Variable cost per unitQ = N
10、umber of units sold (produced),Profit = TR TC,Profit = P(Q) F V(Q),P(Q) = F + V(Q) + Profit,Cost Management Systems 22321,University of Technology, Sydney,The Contribution Concept,Contribution margin indicates the amount that contributes to covering fixed costs and the earning of profit for the orga
11、nisation. It can be represented as:The contribution margin can relate to both:Total sales revenue less variable cost, as above (total CM)Sales revenue per unit less variable cost per unit (CM per unit)This information can also be presented through a CM statement. For example, calculate the CM and pr
12、ofit using the following data.,CM = P(Q) V(Q),Data: SP = $5.00 VC = $2.00 FC = $30,000 Units sold = 5,000,Cost Management Systems 22321,University of Technology, Sydney,The Contribution Concept,Each unit sold generates a contribution margin to cover fixed costs. When fixed costs are covered the CM o
13、n additional units sold contributes towards profit. The percentage of revenue that contributes to this can be calculated using the CM ratio:Using the data from the previous slide, we can calculate the CM ratio.Due to the assumptions that underlie CVP analysis, the CM ratio is invariant (i.e. it is t
14、he same irrespective of sales volume).Question: Why is CM such an important piece of information?,CM Ratio =,Sales Revenue,Total CM,CM Ratio =,=,Cost Management Systems 22321,University of Technology, Sydney,The Breakeven Point,CVP analysis can be used to determine the minimum level of sales or acti
15、vity required to break even (point where profit is zero and beyond which increased sales will lead to profit). The graph below represents the profit structure of an organisation using the previous data. The breakeven point is the intersection between the total revenue line and total cost line.,$ Amo
16、unt,Quantity,Remember from lecture 2 that the relevant range must be specified!,TR,TC,$50,000,10,000,20,000,0,Profit Area,Loss Area,Breakeven,FC,Cost Management Systems 22321,University of Technology, Sydney,The Breakeven Point,Breakeven analysis can also be done through the following equations.The contribution margin ratio may also be used to calculate breakeven.Example: Calculate the breakeven point using the CVP formula and CM ratio.,
