Cost-Volume-Profit company assessment
Cost-volume-profit (CVP) analysis is a cost controlling strategy that is used to determine and show how the changes in any company’s costs and volume can affect its operating and net income. CVP depicts how a company’s operating profits is influenced by the changes in variable aspects involving the company. The various aspects can be, costs, selling price per unit, fixed costs, and the sales mix resulting from the sale of 2 or more varying products. Normally while undertaking this particular analysis, there are a few assumptions that are advisable to be considered.
The assumptions made can be;
- All of the incurred costs can be listed and categorized as either variable or fixed.
- The sales price per unit is constant.
- The total fixed costs are also constant.
- Another constant variable is the variable cost per unit.
- There is also an assumption with the sale mix issue whereby there may be a situation where two or more products are sold together one hence, they are assumed to have been sold in the same mix
- The model also works with the assumption that everything that was produced has been sold.
In ascertaining the impact of CVP on the company’s pricing strategic and profitability. The accountant tasked with this issue will bring out the following information to gauge on the company.
- Information on the products or services to be emphasized on. In this case, the pricing and profitability strategy can be applied to give out the desired out come.
- Information either to increase the fixed cost is determined. This option will impact the company’s pricing strategy.
- It is through this avenue where the amount of expenditure discretion may be applied. This alternative also impacts on the pricing strategy.
- The information picked from CVP can be helpful as the volume of the required sales to attain a certain level of profit can be calculated, hence, impacts the company’s profitability strategy.
- Another impact on the pricing strategy of the company is that, the fixed cost can be determined from the outcome of the analysis to show if the company is exposed to dire levels of risk by the fixed figure.
We begin involving Contribution into the picture. First we need to probe the various equations used in this analysis. There are equations involved in the analysis of company’s cost control. In showing the impacts in the form of figures, the following equation applies for CVP.
Operating Income = Sales - Total Variable Costs - Total Fixed Costs
And the basic profit equation shown below
Profit =Total revenue-Total costs
If both of the equation gives positive and considerably figures then, the company’s pricing and profitability are on the right track.
Contribution Margin (CM)
We then bring on CM like had be earlier proposed. CM refers to the total amount in revenue less the total variable costs.
CM=Total revenue-Total variable cost
CM per unit=Total selling price per unit-Total variable cost per unit
Both of the two equation results into valuable tools to be taken in account when considering the effects imposed on the volume on the profit. CM per unit depicts of how much money is received from the sale of each unit. Relating it to our company’s situation, the CM per unit can be applied in the fixed costs as a pricing strategy. Once the sale of enough units has been achieved, all the occurring fixe costs are then factored in the CM per unit in the remaining sales to constitute the profit. This gain shows how this method of cost control probes the profitability strategy of the company in question.
The following equation involves CM per unit calculations.
Profit=P×Q-V×Q-F=P-V×Q-F
Whereby, V= Variable cost/unit
P = Selling price/unit
(P-V) = Contribution Margin/unit
F = Total fixed cost
Q = Quantity of the sold products
- Calculate the company’s Break-Even (BE) units and dollars at the current price level.
BE units,
Variable Costs per unit (624,000 / 240,000) Material =2.6
(658,000 x 264,000) Variable Labor =2.49 (246,400 / 56,000) Variable Production Overhead =4.4 (142,900 x 56,000) Variable Sales Overhead =2.55 = $12.04 variable cost per unit
Fixed Costs 56,000 Fixed Labor 80,000 Fixed Production Overhead 252,000 Fixed Sales Overhead = $388,000 total fixed costs
The standard SP is $30per unit. Hence;388,000+ 12.04x = 30x This gives 21,603.56 B.E units
For the dollar bit, 21,603.56 x 30= $648,106.9 B.E dollars
- Scenario 1, 10% change in selling price.
10% decrease from $30 will be, $27
388,000+ 12.04x = 27x This gives 25,935.82 B.E units
For the dollar bit, 25,935.82 x 27= $700,287.38 B.E dollars.
Hence showing an increase in the sales volume
- Scenario 2, 10% increase in units of production will increase the 80,000 production units to 88,000 hence fixed cost becomes,
Fixed Costs 56,000 Fixed Labor 88,000 Fixed Production Overhead 252,000 Fixed Sales Overhead = $396,000 total fixed costs
396,000+ 12.04x = 30x This gives 22,049 B.E units
For the dollar bit, 22,049 x 30= $662,470 B.E dollars
Both the B.E in units and dollars decreases.
- According to the data calculated, I would not recommend for the % decrease in USP since as much as it raised the B.E in dollars the no of units are also increased hence, forgone.
Works Cited
Peavler, R. (2010, na na). How to do Cost-Volume-Profit Analysis - An Introduction. Retrieved from Bisiness Finance About.com webs ite: http://bizfinance.about.com/od/pricingyourproduct/a/how-to-do-cost-volume-profit-analysis.htm
Wiley. (2004 , September 27). Cost-Volume-Profit Analysis . Retrieved from Willey and son website: www.wiley.com/college/sc/eldenburg/ch03.pdf
