# Cost volume profit analysis Essay

1.1. Introduction to the concept

The Cost-Volume-Profit(C-V-P) analysis is the analysis of the cost evolution models, which point out the relation between cost, production volume and profit. The C-V-P analysis is a useful forecasting as well as managerial control tool. This analysis technique expresses the relation between income, sales structure, costs, production volume and profits and includes break-even point analysis and profit forecasting procedure. These relations may be used by managers to make short term forecasts, to assess company performance and to analyze decision making alternatives.

Cost volume profit analysis of three variables i.e. cost volume and profit. This analysis measures variation of cost volumes and their impact on profit is affected by several internal and external factors which influences sales revenue and costs. Cost volume profit analysis helps the management in profit planning. Profit of a concern can be increase by increasing the output and sales or reducing cost. If a concern produces to maximum capacity and sell, contribution is also increased to maximum level.

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The cost volume profit analysis is attempted to measure the effect of changes in volume, cost, price and product mix on profit. With increase in volume units costs of production decrease and vice versa, because the fixed costs are constant. With decrease in fixed cost per unit profit will be more. Cost volume profit analysis is made with the objective of ascertaining the following The cost for various level of product.

The desire volume of production.

The profit at various level of production.

The difference between sales revenue and variable cost.

Cost volume profit analysis is a logical extension of marginal costing. It is based on the same principles of classifying the operating expenses into fixed and variable. Now an it has become a powerful instrument in the hands of policy makers to maximize profit. There may be change in the level of production due to many reasons, such as competition, introduction of new product, trade depression or boom, increased demand for the products, and changes in selling prices of the changing levels of production. A number of techniques can be used as an aid to management in this respect. One such technique is the break even analysis. The term cost volume profit analysis is the narrower as well as broader sense. Used in its narrower sense, it is concerned with finding out the breakeven point; i.e. level of activity where the total cost equals total selling price. Used in its broader sense, it means that system analysis which determines the probable profit at any level of production. The break even analysis establishes the relationship of cost volume and profit; so this analysis is known as “Cost Volume Profit analysis”. 1.1.1. Marginal Costing

Marginal costing is defined by IMA London as “The ascertainment of marginal cost, by differentiating between fixed and variable costs, and of the effect on profit of changes in volume or type of output”. This definition makes it clear that marginal costing goes beyond the ascertainment of costs. It is a technique concerned with the effect on profit when the volume or type of output changes. In particular, marginal costing studies the effect which fixed cost has on the running of business.

1.1.2. Break Even Point:

The BEP is the volume of output at which total costs is exactly equal to revenue. It is a point of no profit and no loss. This is the minimum point of production as which total cost is recovered and after this point profit begins.

B.E.P = F / (S – V)

Where:

B.E.P = Break-even point (units of production),

F = Total Fixed costs,

V =Variable costs per unit of production, S =Savings or additional returns per unit of production, and the mathematical approach is best presented using examples.

Fixed cost

B.E.P (unit) = ———————————————————— Selling price per unit – marginal cost per unit.

(a) In term Of Value

B.E.P = Fixed cost * Sales

Contribution

(Or)

B.E.P = Fixed cost P/V ratio

(b) In term Of Units

B.E.P = Fixed cost

Contribution per unit

1.1.3. Required Sales

(a) In term Of Values

= Fixed Cost + Required Profit

P/V Ratio

(b) In Term of Unit

= Fixed Cost + Required Profit

Contribution per Unit

1.1.4. Profit volume ratio

The profit / volume ratio, better known as contribution / sales ratio (C/S ratio), expresses the relation of contribution to sales.

P/V ratio = Contribution * 100

Sales

(Or)

P/V ratio = Fixed cost + Profit *100

Sales

1.1.5. Margin of Safety

Margin of safety may be defined as the difference between actual sales and sales at breakeven point.

(a) M/S = Actual Sales – B.E.P

(b) M/S = Profit P/V Ratio

1.1.6. Contribution

Contribution is the difference between sales and the marginal cost of sales. It is also known as contribution margin or gross margin.

Contribution = Sales – Variable cost

Contribution = Fixed cost + Net Profit

Contribution = Fixed cost – Net Loss

Contribution = Sales * P/V Ratio

1.1.7. Contribution per Unit

Contribution per Unit = Sales per Unit – Variable Cost per Unit.

Cost-Volume-Profit(C-V-P) analysis is a technique that examines changes in profits in response to changes in sales volume, costs and prices. It is used to plan future level of operating activity and provide information about. Which products or services to emphasize.

The volume of sales needed to achieve a targeted level of profit. The amount of revenue required to avoid loss.

Whether to increase fixed costs.

Whether fixed costs expose the organization to an unacceptable level of risk. Based on C-V-P analysis, the management may set the necessary sales level

to earn the desired profit. C-V-P analysis is increasingly used in the budgeting process. 1.2. Objectives of the project study

To know how to prepare a cost statement as per marginal costing. To compute the profit or loss made on each product.

To find out P/V Ratio.

To find out Break Even Point.

To find out Margin of Safety.

To find out highest and lowest profit yielding products of the company. To suggest company targeted production volume to achieve their projected profit for next year.

Literature Review

1. Li Tak Ming, Andy

Deputy Head, Department of Business Administration, Hong Kong Institute of Vocational Education Title: A Cost- Volume- Profit Analysis

Cost volume profit analysis is the study of effects on future profit of change in fixed cost, variable cost, sales prices, quantity. It ia also known as break even analysis. Cost volume profit is useful management tool used by planner in determining the amount of sales needed to cover all expenses. 2. Wei Shih

Title: A general Decision model for cost volume profit analysis under uncertainty. This paper presents a general decision for cost volume analysis which takes into account the crucial element of random demand and level of production in the determination of actual sales and resulting profit. 3. Dr. Mode Shubita

Title: usefulness of cost volume analysis as a managerial concept. In order to cope with planning decision manager use cost volume profit analysis. They find it an extremely useful measurement in a variety of ways. This paper aimed to increase the understanding usefulness of cost volume profit concept. 4. Karen s. Hreha and Wondy M. Liao

College of commerce and Business administration,

University of Illionois at Urbana champaign.

The tradition CVP analysis has been extended to consider the effect of learning. Learning effect have a significant impact on CVP analysis, they not only change the traditional breakeven point, but also affect the distribution of profit. This paper demonstrates the effect of learning on cost volume profit analysis and develops a cost volume profit model with consideration given to both single and probilistic learning rate estimates.

Part III

RESEARCH METHODOLOGY

Research is based on descriptive study

DATA COLLECTION

I have collected data through primary and secondary data.

Type of Data

1) Primary Data

Personal Investigation

Observation Method

Information from respondents

Information from superiors of the organization

2) Secondary Data

Published Sources such as Journals, Government Reports, Newspapers and Magazines etc. Unpublished Sources such as Company Internal reports prepare by them given to their analyst & trainees for investigation.

Sampling Size: 10

Sampling area

Mansa, Gujarat.

Sampling Unit

Finance department of Krishna seeds Farm

Part-V

Data analysis and interpretation

For the product Desi cotton HD-123(Desi-5)

i. Marginal costing

Sales = price X total no. of packets produced and sold

= 425 X 128000

Sales = 54400000 RS.

Variable cost per unit = cost of processing(material and labour) + other cost(sales and support) = 209 + 49

Variable cost per unit = 255 Rs.

Total Variable cost = variable cost per unit X total no. of packets sold Total variable cost = 255 X 128000

Total variable cost = 32640000 Rs.

Fixed Cost = 15232000 Rs.

Total cost = (variable cost per unit X total no. packets produced) + Fixed cost = (255 X 128000) + 15232000

Total cost = 47872000 Rs.

Total contribution margin = Total sales – Total variable cost = 54400000 – 32640000 Total contribution margin = 21760000 Rs.

Profit = Total contribution margin – Fixed Cost

= 21760000 – 15232000

Profit = 6528000 Rs. On product HD-123.

Interpretation

As per marginal costing concept we have to determine Sales value, variable cost incurred on each product, Fixed cost on product, total contribution margin per unit, total cost incurred to produce a product and profit earned on product to prepare cost statement. Profit made on the product HD- 123 is Rs. 6528000.

P/V ratio

P/V ratio = ( Contribution / sales) X 100

= ( 21760000 / 54400000 ) X 100

P/V ratio = 40 %

Interpretation

To find out profit volume ratio above formula is universally used which provides relationship and dependency between profit and volume. For the product HD-123, P/V ratio is 40%.

Break Even Point

In term of units

BEP = fixed cost / contribution margin in no. of packets

= 15232000 / 170

BEP = 89600 packets

In term of amount.

BEP = Fixed cost / contribution margin ratio

= 1523200 / 0.40

BEP = 38080000 Rs.

Interpretation

After analyzing the above BEP, we can conclude that company have to sold 89600 packets and have to earned Rs. 38080000, because at this position will not get loss or any profit. Margin of Safety percentage

In Units

Margin of safety percentage = (Actual units sold – BEP in units) / Actual units sold X 100 = (128000 – 89600) / 128000 X 100 = 38400 / 12800 X 100

= 0.3 X 100

Margin of safety percentage = 30 %.

In Revenue

Margin of safety percentage = (Actual sales – BEP in sales) / Actual sales X 100 = (54400000 – 3808000) / 54400000 X 100 = 16320000 / 54400000 X 100 = 0.3 X 100

Margin of safety percentage = 30 %.

Interpretation

The margin of safety can be calculate using actual or estimated sales values. Here margin of safety is calculates using actual sales value. After analyzing margin of safety we can conclude that, manager have to put more emphasis on reducing cost and increasing sales to avoid potential losses.

For the product Desi cotton AAH-1(Desi-22)

i. Marginal costing

Sales = price X total no. of packets produced and sold

= 438 X 121600

Sales = 53260800 RS.

Variable cost per unit = cost of processing(material and labour) + other cost(sales and support) = 219 + 47

Variable cost per unit = 266 Rs.

Total Variable cost = variable cost per unit X total no. of packets sold Total variable cost = 266 X 121600

Total variable cost = 32345600 Rs.

Fixed Cost = 14913024 Rs.

Total cost = (variable cost per unit X total no. packets produced) + Fixed cost = (266 X 121600) + 14913024

Total cost = 47258624 Rs.

Total contribution margin = Total sales – Total variable cost = 53260800 – 32345600 Total contribution margin = 20915200 Rs.

Profit = Total contribution margin – Fixed Cost

= 20915200 – 14913024

Profit = 6002176 Rs. On product AAH-1.

Interpretation

As per marginal costing concept we have to determine Sales value, variable cost incurred on each product, Fixed cost on product, total contribution margin per unit, total cost incurred to produce a product and profit earned on product to prepare cost statement. Profit made on the product AAH-1 is Rs. 6002176.

P/V ratio

P/V ratio = ( Contribution / sales) X 100

= ( 20915200 / 53260800 ) X 100

P/V ratio = 39.26 %

Interpretation

To find out profit volume ratio above formula is universally used which provides relationship and dependency between profit and volume. For the product AAH-1, P/V ratio is 39.26 %.

Break Even Point

In term of units

BEP = fixed cost / contribution margin in no. of packets

= 14913024 / 172

BEP = 86704 packets

In term of amount.

BEP = Fixed cost / contribution margin ratio

= 14913024 / 0.3926

BEP = 37985288 Rs.

Interpretation

After analyzing the above BEP, we can conclude that company have to sold

89600 packets and have to earned Rs. 37985288, because at this position will not get loss or any profit. Margin of Safety percentage

In Units

Margin of safety percentage = (Actual units sold – BEP in units) / Actual units sold X 100 = (121600 – 86704) / 121600 X 100 = 34896 / 121600 X 100 = 0.2869 X 100

Margin of safety percentage = 28.69 %.

In Revenue

Margin of safety percentage = (Actual sales – BEP in sales) / Actual sales X 100 = (53260800 – 37985288) / 53260800 X 100 = 15275512 / 53260800 X 100 = 0.2868 X 100

Margin of safety percentage = 28.68 %.

Interpretation

The margin of safety can be calculate using actual or estimated sales values. Here margin of safety is calculates using actual sales value. After analyzing margin of safety we can conclude that, manager have to put more emphasis on reducing cost and increasing sales to avoid potential losses.

For the product BT cotton HC-5(Nagraj-5)

i. Marginal costing

Sales = price X total no. of packets produced and sold

= 730 X 105000

Sales = 76650000 RS.

Variable cost per unit = cost of processing(material and labour) + other cost(sales and support) = 272 + 181

Variable cost per unit = 453 Rs.

Total Variable cost = variable cost per unit X total no. of packets sold Total variable cost = 453 X 105000

Total variable cost = 47565000 Rs.

Fixed Cost = 19740000 Rs.

Total cost = (variable cost per unit X total no. packets produced) + Fixed cost = (453 X 105000) + 19740000

Total cost = 67305000 Rs.

Total contribution margin = Total sales – Total variable cost = 76650000 – 47565000 Total contribution margin = 29085000 Rs.

Profit = Total contribution margin – Fixed Cost

= 29085000 – 19740000

Profit = 9345000 Rs. On product HD-123.

Interpretation

As per marginal costing concept we have to determine Sales value, variable cost incurred on each product, Fixed cost on product, total contribution margin per unit, total cost incurred to produce a product and profit earned on product to prepare cost statement. Profit made on the product HD- 123 is Rs. 9345000.

P/V ratio

P/V ratio = ( Contribution / sales) X 100

= ( 29085000 / 76650000 ) X 100

P/V ratio = 37.94 %

Interpretation

To find out profit volume ratio above formula is universally used which provides relationship and dependency between profit and volume. For the product HD-123, P/V ratio is 40%.

Break Even Point

In term of units

BEP = fixed cost / contribution margin in no. of packets

= 19740000 / 277

BEP = 71263 packets

In term of amount.

BEP = Fixed cost / contribution margin ratio

= 19740000 / 0.3794

BEP = 52029520 Rs.

Interpretation

After analyzing the above BEP, we can conclude that company have to sold 89600 packets and have to earned Rs. 38080000, because at this position will not get loss or any profit. Margin of Safety percentage

In Units

Margin of safety percentage = (Actual units sold – BEP in units) / Actual units sold X 100 = (105000 – 71262) / 105000 X 100 = 33738 / 105000 X 100 = 0.3213 X 100

Margin of safety percentage = 32.13 %.

In Revenue

Margin of safety percentage = (Actual sales – BEP in sales) / Actual sales X 100 = (76650000 – 52029520) / 76650000 X 100 = 24620480 / 76650000 X 100 = 0.3212 X 100

Margin of safety percentage = 32.12 %.

Interpretation

The margin of safety can be calculate using actual or estimated sales values. Here margin of safety is calculates using actual sales value. After analyzing margin of safety we can conclude that, manager have to put more emphasis on reducing cost and increasing sales to avoid potential losses.

Conclusion:

Krishna Seeds Farm, they have skilled manpower in factories and administration They have a good and well equipped safety and security department. It was found that Krishna has a very improper working culture. They have their own production unit centre at Gujarat.

The company facing problems of less production capacity than competitors and high price of product. Government policies having the huge impact on the industry.

SUGGESTIONS

Krishna Seeds Farm should take steps to manage the lead time in the production process, because this may sometime hamper the brand image of the company. Krishna Seeds Farm should not dispatch its product without proper quality check. Krishna Seeds Farm should adopt innovation and changing environment. Krishna Seeds Farm should target to capture more and more market in future. Krishna Seeds Farm should maintain good working culture in the following way:

Books

1. Flora Guidry and James O. Horrigan(2005). A cost volume profit analysis.Pitsburg, Pitsburg state university 2. Michael cafferky(2010). The definitive guide to cost volume profit analysis. Indonesia, business expert. 3. Rick Daysog(2006). Fundamentals of cost volume profit analysis. MCGROW Hills. 4. Debarshi Bhattacharya(2010). Features of cost volume profit analysis. India, Pearson Education India.

Newspaper articles

Sullivan, D. D. (2000, November 15). Teens say they’re battling depression, peer pressure: ‘You kind of drift apart from your parents,’ one high school student says. The Telegram, p. 17 Website

Newfoundland and Labrador Environment Network. (2011, October 7). Voting for the environment: Environment Network releases review of party policies.

Retrieved from http://www.nlen.ca/issues/forests/voting-for-the-environment-environment-network-releases-review-of-party-policies Journal articles

Kozma, A., & Stones, M. J. (1983). Re-validation of the Memorial University of Newfoundland scale of happiness.Canadian Journal on Aging, 2(1), 27-29.