Question

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NEED ANSWER ASAP / ANSWER NEVER USED BEFORE

Write about cost-volume-profit and provide examples of break-even and target profit. Show formulas as needed and draw a graph or two in Excel showing how cost-volume profit works.

THE WRITTEN PART IN COPY PASTE

THE GRAPH CAN BE PUT AS AN ATTACHMENT

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ANSWER THROUGHLY 1-2 pages ( paragraph form/ paper assignment)

COPY AND PASTE NOT ATTACHMENT PLEASE

NEEDS TO BE AN ORIGINAL SOURCE ANSWER NEVER USED BEFORE

Answer 1

Cost Volume Profit analysis

CVP analysis is done to find out the impact of change in one unit of quantity has on the whole profitability of the company. To study this the company has to study the various costs involved in the production or manufacturing of the product. These costs are basically Fixed Cost and Variable cost.

Fixed costs are the costs that are not affected by the unit sales e.g. salaries of fixed employees, rent of the factory, electricity charges of office etc. Variable Costs on the other hand are incurred directly proportional to the the unit sales e.g. wages of temporary workers, power charges of machines, commission given to sales force etc.

Variable costs can be aggregated into a “total” or expressed on a “per-unit” basis. Fixed costs, by definition, do not change with the number of units sold or produced. Variable costs are however constant when calculated on per-unit basis.But total variable costs increase with every increase in unit sales volume. Fixed costs, on the other hand, do not change as a direct result of short-term unit sales increases or decreases.

The standard linear equation, Y = mX + b, helps explain the relationship between total costs and unit volume. In this application, Y will represent a company’s total cost, m will be its variable cost per unit, X will represent the quantity of products sold (or produced), and b will represent the fixed cost.

Total cost ($) = Variable cost per unit ($) * Quantity (N) + Fixed cost ($)

Graph for this equation where total cost is the y axis and the quantity represents the x axis perfectly explains the relation between cost and quantity.

Break Even Analysis

The break-even level gives us the situation in which the whole total cost is covered by the sales. This just gives the point at which the profit is zero. Break-even is only possible if a firm’s prices are higher than its variable costs per unit. If so, then the extra amount after deducting variable cost from the sales will be used to cover up the fixed cost . The difference between price per unit and variable cost per unit is called contribution per unit.

Formula used

Contribution(p/u) = Sales price(p/u) - Variable cost(p/u)

contribution margin =100 * contribution/sales price

Break even Volume= Fixed Cost/Contribution(p/u)

Break even Revenue = Fixed cost/Contribution margin(%)

Example Apprentice Mousetraps wants to know how many units of its “Magic Mouse Trapper” it must sell to break even. The product sells for $20. It costs $5 per unit to make. The company’s fixed costs are $30,000. Break-even will be reached
when total contribution equals fixed costs.

Break even Volume= Fixed Cost/Contribution(p/u)

Contribution(p/u) = Sales price(p/u) - Variable cost(p/u) = 20-5 =15 $

Break even Volume= 30000/15 = 2000 mousetraps.

Graph for Break even is given below

Target Profits

In launching a program, managers often start with an idea of the profit they desire and ask what sales levels will be required to reach it. Target volume (N) is the unit sales quantity required to meet an earnings goal. Target revenue (£) is the corresponding figure for money sales. This is just an extension of BEp analysis.

Target volume (N) = (Fixed cost + Target Profit) / Contribution(p/u)

Target Revenue = Target volume (N) * Selling price p/u

or

= [Fixed cost + Profit ] / Contribution margin (%)

Example Mohan, an artist in the US, wants to know how many caricatures he must sell to realize a yearly profit objective of $15,000. Each caricature sells for $10 and costs $2.50 in materials to make. The fixed costs for Mohan’s studio are $15,000 per year:

Target volume (N) = (Fixed cost + Target Profit) / Contribution(p/u)

= (Fixed cost + Target Profit) / (SP p/u - VC p/u)

= (15,000+15,000) / (10-2.5)

= 4000 caricatures per year

Target revenue = Target Volume * selling Price

= 4000*10 = $ 40000

Excel Question and graph

Selling price $	10
Variable cost $	5
Fixed cost $	20000
Units	SP	VC	Fixed Cost	Total Cost
0	0	0	20000	20000
2000	20000	10000	20000	30000
5000	50000	25000	20000	45000
6000	60000	30000	20000	50000
8000	80000	40000	20000	60000
9000	90000	45000	20000	65000
10000	100000	50000	20000	70000
12000	120000	60000	20000	80000

Scatter Plot For above solution