Accounting for Managers

Unit 4
Cost – Volume Profit
Analysis
D R S H I VA N I S H A R M A
Cost – Volume Profit Analysis
To do an effective job in planning, management must have analysis
which allow reasonably correct predictions of how profits will be
affected by a change in any of these factors.
A Cost -Volume Profit Analysis is useful to management in knowing
how profit is influenced by sales volume, sales price, variable
expenses and fixed expenses.
Broadly, CVP analysis uses the techniques of :
1. Break -even analysis
2. Profit - Volume analysis
The objectives of cost-
volume profit analysis are:
1. To forecast profits accurately.
2. To help to set up flexible budgets.
3. To help in performance evaluation for purposes of
control.
4. To formulate proper pricing policy.
5. To know the overheads to be charged to production at
various levels.
Break- Even Analysis
Break-even analysis is the form of CVP analysis. It indicates the level of sales at
which revenues equal costs. This equilibrium point is called the break even
point.
It is the level of activity where total revenue equals total cost.
it is said that the study up to the state of equilibrium is called as break even
analysis and beyond that point we term it as CVP analysis.
Cost – Volume Profit analysis helps the management in profit planning. Profits
are affected by several internal and external factors which influence sales
revenues and costs.
Break- even Analysis Chart
Que.1) Calculate BEP in units and value where the
selling price is Rs. 25/unit and variable cost is Rs.
15/unit. Total fixed cost for 3000 units production is
Rs.12,000.
Practice: Calculate BEP in units and Value: Selling price per
unit Rs. 40, variable cost per unit Rs. 24 and Fixed cost Rs.
16000.
What will be Profit volume ratio.
Que.2) From the following details calculate BEP. Variable cost per unit Rs.
15; Fixed cost Rs 54,000. Selling price per unit Rs. 20. (ans. BEP = 10,800
units; BEP in Rs. 2,16,000).
What should be the selling price per unit of the BEP should be brought
down to 6,000 units. (ans. Rs.24 per unit)
Que.3) From the following information calculate BEP and sales to earn a
profit of Rs. 2, 40,000.
Where, sales Rs. 8,00,000; Fixed cost Rs. 3,60,000; and Variable cost Rs.
5,60,000.
{Ans. BEP Rs. 12, 00,000 and PV ratio = 30%, sales Rs. 20, 00,000 to earn a
profit.}
Que. 4) From the following information calculate PV ratio,
Fixed cost, desired profit if sales are budgeted to Rs. 90,000.
{Ans. PV ratio = 25%, FC = 15,000 and desired profit Rs. 7500}
Que. 6) Given the following information
Calculate: i) PV ratio (ans. 50%) , ii) Fixed cost (ans. 55000) , iii) Level of activity if
Rs. 25,000 is to be earned as a profit (ans. 16,00,000)
iv) Expected profit if sales are budgeted at Rs. 18,000 (ans. 35,000). v) BEP in Rs.
(ans. 11,000).
 Que. 5) A company produces single article named as product A. Following cost data is
given of that product.
Selling price per unit Rs. 40; Variable cost per unit is Rs. 24; Fixed cost Rs. 16,000. You are
required to Calculate:
1. Profit volume (PV) ratio; (ans. 40%)
2. Break - even point in units and value both; (ans. 1000 units and Rs. 40,000)
3. Sales to earn a profit of Rs. 2000; (ans. 1125 Units )
4. New break even sales if the selling price is reduced by 10%; (ans.1333 units)
5. Profit at the sells of Rs. 60,000. (ans. Rs. 8000)
Que. 7) Sales Rs. 1,00,000; Profit Rs. 10,000; Variable Cost =
70 % of sales. Calculate PV ratio; Fixed cost ; and Sales volume
to earn a profit of Rs. 40,000. {Ans. PVratio 30%; FC = 20,000
and Sales for desired profit Rs. 2,00,000. }
Que. 8) Profit statement is given:
Calculate PV ratio and on the basis of PV ratio calculate the followings:
•Sales for 40% PV ratio.
•BEP in Value.
•Contribution when the sales amount to Rs. 2, 56,000.
•Margin of safety when profit is Rs. 4,000.
•Variable cost when the sales amount to Rs. 2, 56,000.
•% of profit on the basis of % of MOS when sales amount of Rs. 3, 20,000.
•If the selling price is reduced to Rs. 16. The new sales volume to offset this price reduction.
•Sales to earn a profit of Rs. 40,000.
Particulars Amount (in Rs.)
Sales (16,000 units) 3,20,000
(-) Variable Cost 2,40,000
Contribution 80,000
(-) Fixed Cost 60,000
Profit 20,000
Que. 9) The Fixed cost amount to Rs. 50,000 and % of variable
cost is 66.67%. If the capacity is Rs. 300000. Find out the BEP
and % sales when it occurred. Determine the profit at 80%
capacity.
Que. 10) Sales of Rs. 200000, Profit Rs. 20,000, and
Variable cost is 60%. Calculate PV ratio; fixed cost, and
sales volume to earn a profit of Rs. 50,000.
Que. 11) from the following data calculate BEP in units and value and
number of units must be sold to earn a profit of Rs. 90,000. Fixed
factory cost Rs. 60,000, fixed selling overheads Rs. 12,000, variable
manufacturing cost per unit Rs. 12 and variable selling cost is Rs. 3 per
unit, selling price per unit is Rs. 24.
Que. 12) from the following data calculate : PV ratio, BEP, and sales
required to earn profit of Rs. 4,50,000.
Fixed cost Rs.90, 000, variable cost: Direct material Rs. 5 per unit; Direct
Labour Rs. 2/unit; and Direct overheads 100% of direct labour. Selling
price per unit Rs. 12.
Que. 13) Find out BEP and what should be the selling price
per unit if BEP should be brought down to 6000 units. Variable
cost per unit Rs. 15, Fixed cost Rs. 54,000 and Selling price per
unit Rs. 20.