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Cost Volume Profit

This document discusses two pricing strategies for a new product under consideration by the senior managers of ILC Division. The first strategy sets a price of Rs. 170 with annual fixed costs of Rs. 22 million. The second strategy sets a higher price of Rs. 190 but with higher annual fixed costs of Rs. 27 million due to greater advertising and promotion expenditures. The document then provides background on cost-volume-profit (CVP) analysis and key terms used in CVP like marginal cost, contribution, profit-volume ratio, break-even point, etc. It concludes with three questions asking to calculate profit probabilities and break-even for the two strategies and discuss how the answers could help choose a strategy given a target profit of Rs

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104 views15 pages

Cost Volume Profit

This document discusses two pricing strategies for a new product under consideration by the senior managers of ILC Division. The first strategy sets a price of Rs. 170 with annual fixed costs of Rs. 22 million. The second strategy sets a higher price of Rs. 190 but with higher annual fixed costs of Rs. 27 million due to greater advertising and promotion expenditures. The document then provides background on cost-volume-profit (CVP) analysis and key terms used in CVP like marginal cost, contribution, profit-volume ratio, break-even point, etc. It concludes with three questions asking to calculate profit probabilities and break-even for the two strategies and discuss how the answers could help choose a strategy given a target profit of Rs

Uploaded by

prashant0071988
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Cost Volume Profit

Analysis
What is the case all about

 A meeting of senior managers at the at the ILC


Division has been called to discuss the pricing
strategies for anew product
 First strategy:- is to set a selling price of Rs.170 with

the annual fixed cost at Rs. 22,000,000. a number of


manager in favour of this strategy as they believe that it
is important to reduce the cost.
 The second strategy is to having a much higher
expenditure on advertisement and promotion and set a
selling price Rs.190. with the higher selling price, the
annual fixed costs would increase to Rs. 27,000,000.
the marketing department is very clear that greater
expenditure on advertising and promotions is essential
for this product.
Marginal Cost
 Marginal cost is defined as the amount at any
given volume of output by which aggregate
cost are changed if the output of volume is
increased or decreased. The aggregate cost may
consist of basically fixed cost and variable
cost. In this fixed cost remain same at any
change of volume, on the other hand the
variable cost may increase or decrease with the
change in volume.
 The definition of the term Marginal
costing requires the computation of :-
a) Marginal cost and
b) CVP(Cost volume profit) Relationship
Cost volume profit analysis
 The intention of every business activity is to earn profit and
maximize it. Determination of profit depends upon the interplay
b/w the following factors, and there exists a close relationship
among these factors:
a) Selling price per unit and total sales amount,
b) Total cost which in its turn may be in the form of
variable cost or fixed cost, and
c) Volume of sales.
 CVP analysis, also known as CVP relationship aims at
studying the relationships existing among these factors
and its impact on the amount of profits.
 The relationships existing among these factors may be

basically presented in two forms:


 In statement or report form, and
 In graphical form, the graphs or charts taking the form

of break-even chart, contribution break-even chart or


profit chart.
Relationship of cost and profit with
volume

 In management, it is very to find out how cost and


profits vary in relation to change in volume, i.e quality
of the product manufactured and sold. Under certain
assumptions, the relationships are usually found to be
linear.
 profit depend on sales depend on selling price depend on cost

volume
Contribution
 The term contribution can be expressed in two ways:-

 Contribution= Sales- Variable cost

 Contribution =Fixed cost+ profit


Profit Volume Ratio
 This ratio indicates the contribution earned with the
respect to one rupee of sales. It is also known as
contribution volume or contribution sales ratio.
 P/V ratio = contribution *100
Sales
 P/V ratio = changes in profit *100
changes in sales
Break-Even Point
 This is a situation of no profit or no loss.
 In break-even point

contribution= Fixed cost


 It is also means that contribution generated by all sales

beyond the break-even point will directly result in to


profits.
 The intention every business to reach the break-even

point as early as possible.


Cont…
 B.E.P(in term of quantity) = Fixes cost
contribution/unit

 B.E.P(in term of amount) = Fixed cost


P/V ratio
Questions:-
 Question- 1:- For both pricing strategies , calculate
the probability of :
i. A profit greater than Rs. 1,500,000
ii. A profit of Rs. 0 (break-even)
iii. A profit greater than Rs. 4,000,000
 Question- 2:- Assuming that the target profit for the
new product is Rs. 4,000,000. discuss whether your
answer to (1) helps manager choose between the two
pricing strategies .
Question-3 :- Discuss how this
technique can be applied to a
large multinational company with
a wide range of product.
Thank you

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