TABLE OF CONTENT
SR.NO DETAILS PAGE NO.
1 EXECUTIVE SUMMARY 2
2 INTRODUCTION TO COMPANY 3
3 CVP ANALYSIS 4
4 CONTRIBUTION INCOME STATEMENT 9
5 CONTRIBUTION INCOME RATIO 12
6 BREAKEVEN POINT 13
7 MARGIN OF SAFETY 14
8 CONCLUSION AND RECOMENDATION 15
9 BIBLIOGRAPHY 16
10 REFRENCES 17
EXECUTIVE SUMMARY
This report examines the COST-VOLUME-PROFIT (CVP) analysis on CCM Fertilizer Company limited. For COST-VOLUME-PROFIT analysis contribution income statement is made. Besides this, total fixed cost, total variable cost, contribution, contribution margin, contribution margin ratio, breakeven point of sales and margin of safety is computed form the
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It may provide very useful information particularly for a business that is commencing operations or facing difficult economic conditions. CVP analysis assists by determining how many units of a product must be sold so that the business ‘breaks even’ i.e. total costs, both fixed and variable are covered by total sales revenue. It allows the business to consider the effect on profits of various changes in operating costs and revenues such as a reduction in selling price or an increase in fixed costs; to determine the sales volume required to achieve a specific profit level and to establish the amount by which the current sales level can decrease before losses are incurred. However, it is important to remember that CVP analysis makes a number of assumptions about the environment within which the business operates. Accounting explained (2013) CVP ANALYSIS, Available at: accountingexplained.com/managerial/cvp-analysis (Accessed: 2014).
Assumptions: Accounting explained (2013) CVP ANALYSIS, Available at: accountingexplained.com/managerial/cvp-analysis (Accessed: 2014).For CVP analysis to be useful the assumptions on which it is based must recognized. These assumptions set the rules for examining relationships between sales volume, costs and profits.
The conditions which are assumed to apply when CVP analysis is used are presented below.
1. All
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If the line starts moving up the horizontal axis this mean that the production is beginning to yield the profits and vice a versa. STRENGHT OF CVP MODEL:
CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis.
Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company. For instance, when a manager knows the breakeven point, he can tweak spending and increase production efforts to increase profitability.
Because CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.
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, transportation expenses and costs for materials can
If the cost system reported sales volume and/or price we would be able to conduct an activity analysis to determine an appropriate cost function to determine the best cost driver for each product.
Our fourth criterion was complexity of the processes involved. In our analysis, the more complex processes often result in higher chances for imperfection or failure. We also felt that processes that require a trained specialist to enhance would not benefit from our analysis because of our lack of understanding the methods. The fifth criterion was personal interest. This was to ensure we were all engaged and interested in working on the decided project.
It adds value to the business i.e. it enhances the business operations which would inturn have a positive impact on the business
- Helps to identify opportunities in the market place. - Minimize the risk of doing business. - Uncovers and identifies potential problems. - Create benchmarks and helps track progress. - Evaluating the success of the business.
The breakeven point is used my companies to prevent loss. The Cost Volume Profit (CVP) is the tool in which to capture the breakeven point. Sometimes it is referred to as the breakeven analysis. The CVP assists the company in identifying future operation need, production costs, and expansion possibilities based on estimating costs, prices, and volumes. This profit response can help Competition Bikes determine the amount of needed sales, what products to manufacture, pricing policies, marketing strategies, and how much profit is actually needed. In this analysis we will assume
This framework helps managers to think strategically and needs to be considered when performing an industry analysis.
This description makes the marketing expenditures sound like they are a variable cost, since it suggests that they vary with the amount of units sold. However, unlike variable costs, the relationship of marketing costs is not directly proportional to sales, since other factors also influence units sold. Thus, it is not a pure variable cost. However, it is also not a fixed cost, in that there usually is a relationship between marketing expenditures and sales. For CVP purposes, it might best be handled as a mixed cost, having both a fixed and variable
According to, Skills for Business Decisions, “Cost-volume-profit (CVP) analysis examines changes in profits in response to changes in sales volumes, costs, and prices.” (Kimmel P.D. 2009) A company’s profit is the CVP profit equation of Profit = Revenue – Expenses. A Cost-volume-profit (CVP) analysis consists of five basic components that include:
Another variable cost to consider is continuing education and training for employees. Like any business, it is important for those in the health and fitness field to stay on top of current trends in the industry. From time to time it may be beneficial and necessary for full-time employees to attend seminars or training sessions to expand their knowledge in the industry. This is a good example of a cost that would not be incurred on a regular basis, but should be budgeted for at least once a quarter. Two variable costs that organizations overlook are office supplies and fuel. In every organization employees use office supplies. In many organizations fuel is needed for
It helps managers a lot in evaluating future courses of action regarding pricing and the introduction of new services. CVP analysis or Breakeven is used to compute the volume level at which total revenues are equal to the total costs. When total costs and total revenues are equal, the organization is said to be “breaking even”. Managers can utilize P&L statements which are used to project profit or net income. P&L statements can be developed to serve decision making purposes. These can be created for any subunit within an organization, whereas income statements are created only for the overall accounting entity. Break even analysis contains important assumptions and is very essential to the managers to determine whether assumed values can be realistically achieved. Managers can perform CVP analysis to plan future levels of operating activity and provide information about:
When analysing the CASP tool which is used in this essay, it has 10 different questions and each question
A company's break-even point is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss. Calculating the break-even point (through break-even analysis) can provide a simple, yet powerful quantitative tool for managers. In its simplest form, break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans.
Based on the real world functioning of businesses, every organization that deals with the process of manufacturing of certain products operates in accordance with the main principle of maximizing its profits. During the performance of daily activities, many business managers face a series of questions related to planning, control and decision making. In order to give answers to all these questions, an additional analysis needs to be considered. It is very important for managers to plan carefully how they are going to generate sufficient money to pay down costs and, in this way to result with a profit. As managers are interested in having the adequate information about the influence that certain actions might have on the profitability of the business, "Cost Volume and Profit" analysis plays a significant role by being a potential tool in facilitating the process of making the right decisions regarding planning and control in order to add value to the company. (Trifan and Anton, 2011). To further illustrate the essential impact that CVP analysis has on management authorities in making better decisions, I will refer to and analyze the case of the Hampshire Company which follows as below.
Cost volume profit (CVP) analysis and costing for the 21st century has evolved into a very complex and difficult paradigm. Even the most gifted accountants find that grasping the entire concept of accounting for a corporation can be very mind-boggling and difficult. Yet, understanding such a fundamental principle can allow corporations to grow in ways that other, less educated, corporations can never dream to achieve and simultaneously understand the ‘bottom-line’. In this paper we will discuss value costing in the 21st century, other relevant costing methods, and the relevancy of CVP in today’s workplace.
Cost behavior is one of the most important aspect which helps in analyzing the nature and responses of different costs. Generally the cost behavior is breakdown of costs into fixed and variable components. The cost behavior is usually analyzed with the help of CVP analysis. The cost behavior patterns are analyzed by cost-volume-profit analysis, including the calculation of a firm 's break-even point in units and sales dollars.