COST-VOLUME-PROFIT ANALYSIS -break-even analysis is a method of examining the relationships between revenue and costs based on the equation

n profit = sales variable costs fixed costs Volume number of units sold (unit sales) or the amount of revenue generated by sales (sales value). As volume increases so also do costs and revenues. Costs - two categories; fixed and variable. Fixed costs remain constant regardless of the size of sales volume they include heating, lighting, salaries, depreciation, building insurance, and interest on loans. Variable costs are those that vary directly and proportionately with volume typical variable costs are direct labour and raw materials. CVP analysis is closely associated with contribution analysis which emphasises the distinction between variable and fixed costs. The contribution margin = sales revenue - variable costs unit contribution is the margin contributed by each unit sold. Both CVP and contribution analyses are decision-making techniques which provide management with valuable information on how costs can be reduced and profits increased. For example, companies often manufacture several products, and an analysis of each products contribution to total sales or profits would be beneficial. A sales mix analysis is simply the ratio of each products contribution to total company sales revenue. Consider the following example. The Gizmo Company produces three versions of its popular product large, medium, and small. Total fixed costs for the coming year are budgeted at Rs 50,000. Table contains details of sales estimates and variable costs involved in the manufacture of the three products. Gizmo would like to perform an analysis on each products contribution to overall company sales in order to determine which products should be marketed more actively. Finding the Break-Even Points The Gizmo Company would also like to perform some break-even analysis. The break-even point is defined as the output level where total costs are exactly equal to total revenues received, i.e., there is neither a profit nor a

loss. Break-even analysis identifies the level of sales that are required to cover total costs. It also shows the level of sales needed to reach a desired level of profitability.
Mpdel Est Sale Unit Pr VC - Matl L 5000 27.5 Medium 6000 22 S 10000 15.5 VC - Labor 12 8 5 8 7 5

BEPu = Total fixed costs/(p c) where p = unit selling price BEPRs = Total fixed costs/(1 c/p) c = unit variable costs

VC VC Mpdel Est Sale Unit Pr Matl Labor L 5000 27.5 12 8 Medium 6000 22 8 7 S 10000 15.5 5 5 Mpdel Est Sale Unit Pr Rev VC - Matl VC - Labor Unit VC Matl Lab Cost Contri c- margin FC Profit Sales Mix BEP units BEP Rs L 5000 27.5 137500 12 8 20 60000 40000 100000 37500 27% Medium S 6000 10000 22 15.5 132000 155000 8 7 15 48000 42000 90000 42000 32% 5 5 10 50000 50000 100000 55000 35% 134500 50000 84500 32% 6667 183333 31% 7143 157143 37% 9091 140909

424500

Depreciation: Suppose a van is bought for Rs 20,000 with an estimated life of eight years and a residual value of Rs 4000. SLN(20000,4000,8) returns a constant depreciation amount of Rs 2000 for each year. DB function The declining (reducing) balance method. This method adopts a more practical approach by ensuring that each years depreciation value is less than the previous years figure. The assumption is that equipment operates more efficiently when it is new. The sum-of-the-years digits method (SYD). The double-declining balance method using the DDB function. The DDB approach gives an even faster depreciation in the first few years of the life of the equipment than either of the previous two methods. It doubles the rate that equipment would depreciate under the straight-line method The variable-declining balance (VDB) method is the most flexible (and the most complex) of Excels depreciation functions. VDB returns the depreciation on equipment for any specified period, including partial periods, using the double-declining method or some other method specified by the user. The VDB function includes a logical switch, which if set to FALSE, causes VDB to use straight-line depreciation when straight-line depreciation is greater than the declining balance value. For example, VDB(20000, 4000, 8, 0, 3, 2, TRUE) returns Rs 11,563, which is the accumulated depreciation figure for years 1 to 3 using the DDB method. Some firms use one type of depreciation for financial reporting (e.g., straight-line) and another such as declining balance (DB) for tax purposes. The choice of which depreciation approach to use depends upon the tax laws, which allow different methods to be applied to different types of asset.
Cost Useful Yrs Salvage 20000 8 4000

1 2 3 4 5 6 7 8

0 SLN DB SYD DDB VDB Rs 2,000.00 Rs 3,640.00 Rs 3,555.56 Rs 5,000.00 Rs 5,000.00 Rs 5,000.00 Rs 2,000.00 Rs 2,977.52 Rs 3,111.11 Rs 3,750.00 Rs 3,750.00 Rs 8,750.00 Rs 2,000.00 Rs 2,435.61 Rs 2,666.67 Rs 2,812.50 Rs 2,812.50 Rs 11,562.50 Rs 2,000.00 Rs 1,992.33 Rs 2,222.22 Rs 2,109.38 Rs 2,109.38 Rs 13,671.88 Rs 2,000.00 Rs 1,629.73 Rs 1,777.78 Rs 1,582.03 Rs 2,000.00 Rs 15,671.88 Rs 2,000.00 Rs 1,333.12 Rs 1,333.33 Rs 746.09 Rs 2,000.00 Rs 2,000.00 Rs 1,090.49 Rs 888.89 Rs 0.00 Rs 2,000.00 Rs 2,000.00 Rs 892.02 Rs 444.44 Rs 0.00 Rs 2,000.00 Rs 16,000.00 Rs 15,990.81 Rs 16,000.00 Rs 16,000.00 Rs 21,671.88