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Accounting For Managers - Management Accounting-Cost Volume Profit Analysis

Application Of Cost-Volume-Profit Analysis

   Posted On :  03.05.2018 10:08 pm

Application Of Cost-Volume-Profit Analysis

Application Of Cost-Volume-Profit Analysis
 
 
CPV analysis helps in:
 
ՖՖ                     Forecasting the profit in an accurate manner
 
ՖՖ                     Preparing the flexible budgets at different levels of activity
 
ՖՖ                     Fixing prices for products
 

Illustration 1:

 
 
(Profit Planning) based on the following information, find out the break even point, the sales needed for a profit of rs.6,00,000 and the profit if 4,00,000 units are sold at rs.6 per unit.
 
Units Of Output                                                   5,00,000
 
Fixed Costs                                                    Rs.7,50,000
 
Variable Cost Per Unit                                    Rs. 2
 
Selling Price Per Unit                                     Rs. 5

Illustration 2: (Pricing)

 
 
A company is considering a reduction in the price of its product by 10% because it is felt that such a step may lead to a greater volume of sales. It is anticipated that there will be no change in total fixed costs or variable costs per unit. The directors wish to maintain profit at the present level.

 
 You are given the following information:

Sales (15,000 Units)

Rs.3,00,000

Variable Cost

Rs.13 Per Unit

Fixed Cost

Rs.60,000

 
From the above information, calculate P/V ratio and the amount of sales required to maintain profit at the present level after reduction of selling price by 10%.

Illustration 3:

 
 
From the following data, calculate the break-even point.
 
                                                First year                            Second Year
 
Sales                                        80,000                               90,000
 
Profit                                   Rs.10,000                          Rs.14,000

 

Illustration 4:

 
 
A company is considering expansion. Fixed costs amount to rs.4,20,000 and are expected to increase by rs.1,25,000 when plant expansion is completed. The present plant capacity is 80,000 units a year. Capacity will increase by 50 percent with the expansion. Variable costs are currently rs.6.80 per unit and are expected to go down by re.0.40 per unit with the expansion. The current selling price is rs.16 per unit and is expected to remain the same under either alternative. What are the break-even points under either alternatives? Which alternative is better and why?

 
 

Assuming that the whole production can be sold, the profit under
 
The two alternatives will be:

It is obvious from the above calculations that the profits will be almost double after the expansion. Hence, the alternative of expansion is to be preferred.

Illustration 5:

 
 
A factory engaged in manufacturing plastic buckets is working at 40% capacity and produces 10,000 buckets per annum:

 

Rs.

Material

10

 

Labour cost

3

 

Overheads

5

(60% fixed)

 
The selling price is rs.20 per bucket.
 
If it is decided to work the factory at 50% capacity, the selling price falls by 3%. At 90% capacity the selling price falls by 5%, accompanied by a similar fall in the prices of material.
You are required to calculate the profit at 50% and 90% capacities and also the break-even points for the same capacity productions.

Illustration 6:

 
 
Calculate:
 
ՖՖ The amount of fixed expenses
 
ՖՖ The number of units to break-even
 
ՖՖThe number of units to earn a profit of rs.40,000 The selling price can be assumed as rs.10.
 
The company sold in two successive periods 9,000 units and 7,000 units and has incurred a loss of rs.10,000 and earned rs.10,000 as profit respectively.

Illustration 7:

 
 
From The Following Data Calculate:
 
ՖՖ                    P/V Ratio
 
ՖՖ                    Profit When Sales Are Rs.20,000
 
ՖՖ             Net Break-Even If Selling Price Is Reduced By 20% 

Fixed Expenses Rs.4,000
 
Break-Even Point 10,000
 

Illustration 8:

 
 
From the following data calculate:
 
ՖՖ            Break-even point in amount of sales in rupees.
 
ՖՖ            Number of units that must be sold to earn a profit of Rs.60,000 Per year.
 
ՖՖ            How many units must be sold to earn a net profit of 15% of sales?
 
 
Sales Price                                                       Rs.20 Per Unit
 
Variable manufacturing costs                             Rs.11 per unit
 
Variable selling costs                                         Rs. 3 per unit
 
Fixed factory overheads                                     Rs.5,40,000
 
Fixed selling costs                                             Rs.2,52,000
 



Tags : Accounting For Managers - Management Accounting-Cost Volume Profit Analysis
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