Cost Volume Profit Analysis Break Even Point

Cost Volume Profit Analysis Break Even Point. IntroductionCostVolume Profit AnalysisReview QuestionsCVP analysis looks at the effect of sales volume variations on costs and operating profit The analysis is based on the classification of expenses as variable (expenses that vary in direct proportion to sales volume) or fixed (expenses that remain unchanged over the long term irrespective of the sales volume) Accordingly operating income is defined as follows Operating Income = Sales – Variable Costs – Fixed Costs A CVP analysis is used to determine the sales volume required to achieve a specified profit level Therefore the analysis reveals thebreakeven pointwhere the sales volume yields a net operating income of zero and the sales cutoff amount that generates the first dollar of profit Costvolume profit analysis is an essential tool used to guide managerial financial and investment decisions Contribution Margin and Contribution Margin Percentage The first step required to perform a CVP analysis is to display the revenue and expense line items in a Contribution Margin Income Statement and compute the Contribution Margin Ratio A simplified Contribution Margin Income Statement classifies the line items and ratios as follows * Contribution Margin Percentage The method relies on the following assumptions 1 Sales price per unit is constant (ie each unit is sold at the same price) 2 Variable costs per unit are constant (ie each un Short Answer 1 How would conducting a cost volume profit analysis help a food service operator make decisions about future business ideas? 2 What sort of assumptions need to be made about a food service operation in order to complete a cost volume profit analysis 3 How might calculating a breakeven point be useful to a food service manager?.

The breakeven point is the point where each line cuts the x axis Limitations of costvolume profit analysis Costvolumeprofit analysis is invaluable in demonstrating the effect on an organisation that changes in volume (in particular) costs and selling prices have on profit.

Chapter 15 – Costvolume Profit (CVP) Analysis and BreakEven

IntroductionBreakEven Point FormulaIllustrationBreakeven point refers to the level of activity or sales that will yield to zero profit In other words it is the level at which the business makes no gain or loss If the business operates above the breakeven point it makes profits If it sells below then it incurs in losses The breakeven point is the point where “Sales” is equal to “Total Costs” (where Total costs = Total variable costs + Total fixed costs) The breakeven point provides managers with information useful in profitplanning Breakeven point (BEP) can be determined in terms of number of units or dollar amount The formula for BEP in units is In computing for the BEP in dollars contribution margin ratio is used instead of contribution margin per unit To illustrate the concepts of breakeven point consider the following example The following data summarizes the operations of Company ABC AnalysisAt 2000 units the company will make zero operating income If the company sells more than 2000 units it will make profit Otherwise it will incur in losses To prove consider the following scenarios At 2000 units (breakeven point) At 2001 units (above breakeven point) At 1999 units (below breakeven point) The BEP in dollars is $30000 as shown in the computation at 2000 units Alternatively it can be computed as total fixed costs divided by contribution margin ratio The contribution margin ratio is 6667% ($10/$15) Hence fixed costs of $20000 divided by CM ratio of 6667% results in the BEP in dollars of $30000.

BreakEven Point: Formula and Analysis Accountingverse

The formula for breakeven point (BEP) is BEP =Total Fixed Costs / CM per Unit The BEP in units would be equal to 240000/15 = 16000 units Therefore if the company sells 16000 units the profit will be zero and the company will “break even” and only cover its production costs #3 Changes in Net Income (Whatif Analysis).