ACCAspace ACCA F5. Provided by ACCA Research Institute. Performance Management (PM) 业绩管理 ACCA Lecturer: Kimberley Gong. ACCAspace 中国 ACCA 特许公认会计师教育平台

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1 ACCAspace Provided by ACCA Research Institute ACCA F5 Performance Management (PM) 业绩管理 ACCA Lecturer: Kimberley Gong ACCAspace 中国 ACCA 特许公认会计师教育平台 Copyright ACCAspace.com

2 Content of chapter What is cost volume profit(cvp)/breakeven analysis Single product breakeven analysis 3 Breakeven chart analysis 4 Lecture example 5 Multi-product break-even charting analysis 2

3 What is CVP/breakeven analysis? Most businesses need to at least break-even their setting prices with output levels. The break-even point is the sales volume which will give the company a profit of $nil. If sales exceed the break-even point the company will make a profit. 3

4 Assumptions of CVP/breakeven analysis (a) Can only apply to one product, or to more products Only if they are sold in fixed sales mix (b) Constant unit variable costs and total fixed costs (c) Constant selling price per unit (d) Production volume=sales volume 4

5 Single product breakeven analysis Method 1 : Activity level at which there is neither profit or loss Break even point = Method 2:The amount of contribution earned per dollar of sales Contribution/sales ratio = Fixed costs Unit contribution Contribution/unit Selling price/unit Fixed costs Break even revenue = or C/S ratio Break even point x selling price/unit 5

6 Single product break even analysis Method3:The difference between the budgeted level of activity and the break-even level of activity Margin of safety(in units) = Budgeted sales-break even sales Margin of safety(%) = Sales volume to earn a required profit Budgeted sales- Break even sales Budgeted sales = Required profit+ Fixed costs Contribution per unit 6

7 Breakeven chart analysis Chart 1 : Break-even chart 7

8 Lecture example 1 Company Z has fixed xosts of $6000 and variable costs per unit of $4 Required: A) If the selling price is $8 at all levels,what is the break-even point? B) What is the break even revenue? C) What is the c/s ratio? D)If budgeted sales are 9000 units,what is the margin of safety in units? What is the margin of safety as a %?What doed this mean? E) What are the sales volume (in units) required to make a profit of $5000? 8

9 Lecture example 1 A)BEP= Fixed cost Unit contribution = B) Break even revenue = = 1500X8=12000 C) =4/8=0.5 D) = =7500 9

10 =7500/9000=83.3% E) = =

11 Chart 2:Contribution break-even chart This chart is used to highlight the importance of contribution and focus on the variable costs. 11

12 Chart 3:The profit-volume chart The advantage of profit-volume chart is that it is capable of depicting clearly the effect o profit and break-even point of any changes in variables. 12

13 Multi-product break-even analysis Assume sales mix remains constant. Weighted average C/S ratio = Sales volume to earn a required = Profit Margin of safety = Budgeted sales-break even sales Margin of safety(%)= total contribution total revenue Required profit +Fixed costs weighted average C/S ratio Budgeted sales-break even sales Budgeted sales 13

14 BEP= EG. FC Weighted average contribution per unit A B C units Selling price $4 $5 $6 VC $2 $2 $2 = 1000XCA+2000XCB+3000XCC

15 Multi-product break-even charting analysis 1. Break-even chart (Similar to single product) 2. Product volume graph (Assume product a, b, c) (1) Calculate C/S ratio of each product being sold and rank the products in order of profitability. (2) Asix x shows cumulative sales revenue and asix-y shows cumulative profit earned. Find point V representing total sales and point K representing fixed cost when profit is zero. 15

16 (3) Draw line km. The slope of km is c/s ratio of product a. It shows the profit earned by product a. (4) Draw line mn which represents the profit earned by product b which has lower c/s ratio than product a. Draw line np which represents the least profitable product c. 16

17 Lecture example 2 United Trading sells three products as follows. Product Footballs Baseballs Rugby balls $ $ $ Selling price VC Budgeted sales(units) Assume that the sales mix is fixed in these proportions. Fixed costs are $ Required (a) What is the breakeven sales volume? (b) What is the breakeven sales revenue? (c) Draw the Profit-volume chart 17

18 Lecture example 2 Working : C/S ratio (a) F B R 4/7=57.1% 25% 44.4% A B C contribution proportion=2:4:3 = 2X4+4X1.5X3X = $

19 Lecture example 2 BEP =20000/2.89 = 6921units (b) 6921units F=(2)=1538, B = (4)=3576, R=(3) =2307 X7 X6 X9 =10766 =18456 =20763 Total BER=

20 Lecture example 2 $ Total sales volumes FC

21 Appraisals of CVP analysis Advantages More easily understood by nonfinancial managers Profit/loss at any level within the range can be determined Indication of risks by highlighting breakeven point and margin of safety Disadvantages Assume all costs can be divided as fixed or variable Fixed costs are constant Variable cost or selling price per unit is constant Inventory levels are constant (Sales = Production) Ignore uncertainty in estimating fixed and variable costs 21

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