For your reflection discussion, discuss what you have learned thus far in the course.
subject- Accounting.
COST VOLUME PROFIT ANALYSIS
Take an example of a Dairy plant processing milk.
There are two types of costs associated with production:
Assume fixed costs per annum =$600,000
Fixed costs include depreciation of plant and machinery, salary of management staff , advertisement etc . These costs are fixed per year and do not change with the volume of production
Selling price per litre= $1
Variable cost per litre =$0.8
Variable costs are proportional to the volume of production like price paid for raw milk, cost of transportation ,energy costs etc
Total Cost =$600,000+0.8*Q
Q=Quantity of production and sales in litres
Total Revenue =$1*Q
Profit=(Total Revenue) –(Total Cost)
The following table gives the Revenue, Total Cost and Profit at various level of sales:
Q |
R |
C |
R-C |
Volume of Sales(Litres) |
Total Revenue |
Total Cost |
Profit |
500,000 |
$ 500,000 |
$ 1,000,000 |
$ (500,000) |
1,000,000 |
$ 1,000,000 |
$ 1,400,000 |
$ (400,000) |
1,500,000 |
$ 1,500,000 |
$ 1,800,000 |
$ (300,000) |
2,000,000 |
$ 2,000,000 |
$ 2,200,000 |
$ (200,000) |
2,500,000 |
$ 2,500,000 |
$ 2,600,000 |
$ (100,000) |
3,000,000 |
$ 3,000,000 |
$ 3,000,000 |
$ - |
3,500,000 |
$ 3,500,000 |
$ 3,400,000 |
$ 100,000 |
4,000,000 |
$ 4,000,000 |
$ 3,800,000 |
$ 200,000 |
4,500,000 |
$ 4,500,000 |
$ 4,200,000 |
$ 300,000 |
5,000,000 |
$ 5,000,000 |
$ 4,600,000 |
$ 400,000 |
5,500,000 |
$ 5,500,000 |
$ 5,000,000 |
$ 500,000 |
It may be noted that at volume of sales of 3 million litres , there is Break Even(No Profit no loss).
Break even Sales=$3,000,000
Below Break even ,there is loss.
Above break even sales, there will be profit.
The difference between actual sales (if it is higher than breakeven) and the break even sales is the Safety level.
The Break even point can be calculated by following formula:
Break even Quantity=Fixed Costs/Unit contribution Margin=600000/($1-$0.8)= 3,000,000 Litre
The diagram for CVP(Cost Volume Profit ) is attached
CVP analysis is used in capital budgeting and strategy planning .
CVP analysis can be used to take decision regarding launching of a product, product pricing, target costing etc
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