CVP analysis

• CVP analysis, also known as breakeven analysis, is the point at which there is no profit or loss which will occur if: (i) Total revenue (TR) = Total costs (TC) or (ii) Total contribution = Total fixed costs.
• Whilst the topic is called CVP analysis, it will also be necessary to determine positions of profit and loss.
• Total revenue (TR) = $100, total variable cost (TVC) = ($75), contribution = $25, total fixed costs (TFC) = ($25), profit/loss = $0.
• Total revenue (TR) > total costs (TC), contribution > total fixed costs (TFC) represent profits.
• The costs for Service E are $3,700.
• The overall breakeven sales revenue value for the draft budgeted volumes can be calculated.
• The financial viability of each of the four services currently provided can be evaluated.
• The costs for Service D are $4,400.
• The remaining budgeted fixed costs that will be incurred regardless of the type and number of services provided are $2,650.
• Service F has no budgeted fixed costs.
• A contract exists for the supply of the 1,450 units of service F.
• The limitations of breakeven analysis for decision-making purposes can be commented on.
• If total revenue (TR) is less than total costs (TC) or total contribution is less than total fixed costs (TFC), there would be a loss.
• Total revenue (TR) = $90, total variable cost (TVC) = ($75), contribution = $15, total fixed costs (TFC) = ($25), loss = ($10).
• Total revenue (TR) < total costs (TC), contribution < total fixed costs (TFC) represent losses.
• Single product/single product mix companies, that is, the company sells only one product or if a range of products are sold the product mix remains constant, use the formula approach and graphical approaches.
• Assumptions for single product/single product mix companies include: (a) The company sells only one product or if a range of products are sold the product mix remains constant.
• Revenue for loss = Total fixed costs - Loss Contribution Contribution ratio (CPU).
• A chart which depicts the net profit or loss at any given level of activity is called the profit-volume chart.
• The breakeven units and revenue can also be determined graphically using the Breakeven Chart.
• The y-axis of the profit-volume chart represents net profit above the horizontal line and net loss below the line.
• Revenue for profit = Total fixed costs + Profit Contribution Contribution ratio (CPU).
• The formula for profit is: Number of units for profit = Total fixed costs + Profit Contribution per unit (CPU).
• The breakeven chart shows both revenue and costs over a given range of activity and does not directly highlight the amounts of profits or losses at the various levels.
• The x-axis of the profit-volume chart represents sales units or revenue.
• If the variable cost per unit and total fixed costs are both constant throughout the relevant range of activities, then profit or loss for another level of sales would be determined, which would be the coordinates for the next extreme point for the line.
• The formula for losses is: Number of units for losses = Total fixed costs - Loss Contribution per unit (CPU).
• If there is a changing variable cost per unit and/or total fixed costs at various activities, the profit or loss at each point where the costs structures change would be calculated and plotted on the graph.
• A profit-volume line would be graphically represented as follows: When TR = 0, there will be a total loss equal to the total fixed costs.
• Costs would depict linear characteristics, that is, total fixed cost and variable cost per unit would remain constant.
• Selling price function is also linear where the price per unit remains constant.
• The breakeven point is the point where total costs are equal to total revenues.
• Calculate the margin of safety in units, revenue and as a percentage of sales.
• Total fixed cost per annum is $50,000, variable cost per unit is $20, selling price will remain constant at $30, and sales volume for the period is forecasted to be no more than 8,000 units.
• The profit-volume line is a series of lines joining points together, representing the profitability of different sales volumes.
• The margin of safety can be determined in three ways: MOS units = Budgeted units minus breakeven units, MOS revenue = Budgeted revenue minus breakeven revenue, MOS as % of budgeted sales = Budgeted units or revenue minus breakeven units or revenue.
• Properly label the breakeven chart provided clearly identifying the breakeven point.
• Show how the number of units for $20,000 profit and $10,000 loss can be shown on the chart.
• The profit-volume chart is a tool used to analyze the profitability of different sales volumes.
• Using the formula approach, calculate in both units and revenue: Breakeven, Net profit of $20,000, Net loss of $10,000.