How to Do Cost Volume Profit Analysis

Edited by Xhohx, Adelaide

Cost-Volume-Profit Analysis is an important tool from Cost Accounting to help managers decide how many units to sell, answer questions about the product mix, set profit targets reasonably -- all in accord with a given product's cost behavior given certain assumptions. BreakEven Analysis is the first of the tools in the toolbox and next comes Contribution Margin. Learn about Cost Volume Profit Analysis in the next 7 steps. Note that sometimes BreakEven Charts are shown as in the top, with Variable Costs layered upon a fixed level of Fixed Costs, while cometimes fixed Costs are sown as a Layer atop Variable Costs -- the resulting BreakEven Point is the same, either way.

Steps
1.

1
Do price forecasting. This is a difficult job, because the price of the product must be known. While it may certainly depend a great deal on costs, certain other factors come into play. Among these are:

Pricing policies per the demand curve and other considerations, such as growing the business at a certain pace. Market research studies Past sales volume General economic and industry conditions Relationship of sales to economic indicators such as GNP, personal income, employment, prices and industrial production Advertising and other promotional budget Quality of sales force Competition Seasonal variations Production capacity

Long-term sales trends for various products, i.e. where in product life cycle it is. Research and development allocations in the recent past product improvements.
Ad

2.

2
Understand that fixed costs, such as rent, depreciation, utilities and other costs that are incurred regardless of whether products are sold or not (unless one's depreciation is on the Units-of-Production basis) must be determined.Products may not be sold under cost due to anti-trust regulations and legislation. Some costs have a mixed fixed-variable component basis, which is fine to allocate between so long as treated on a consistent basis between planning periods.

3.

3
Determine variable costs, and the costs which increase of decrease with increases and decreases in production. For example, a manufacturer of ski apparel will have velcro that fluctuates with jackets and warmup pants sold, as well as seasonal changes in production, and fill, etc., as well as a color mix to consider (which may need to respond rapidly to changes in consumer tastes).

4.

Compute the product's Unit Contribution Margin, which is how much of the unit sales price remains towards Total Fixed Costs after Unit Variable Costs are deducted from the Unit Sales Price. For example, the ski apparel's unit price for a jacket might be $150 and the unit variable expenses $75, or 50% of the price. The unit variable costs include direct labor, machine production such as cutting and sewing 4 basic sizes for 2 sexes, then adult and children's, oil for the machinery and repairs to it as budgeted and are standard, etc. standard indirect labor such as color consulting, etc. The contribution margin of this jacket is $75 times the number of jackets projected to be sold, let's say 7812.5 (there are a few 1/2 size infant outfits made for special order). So that's $585,937.5 in total Contribution Margin towards Fixed Costs from this one jacket. Multiplied by 16 distributors of 8 jacket sizes and 8 pant sizes of 4 colors each size, that's 16*(32 + 32) * $585,937.5 = $600,000,000.00. We plan to increase our sales distribution marketing to 32 and double our sales if sales take off early in the season.

5.

5
Compute the Breakeven Point. The breakeven point equals the volume of sales it takes to cover all costs, and it is calculated by dividing the company's Fixed Costs by the Unit Contribution Margin (mixed, but here grossly simplified to be the same selling price and variable cost for pants and jackets, the only two products). For example, let's say the Fixed Costs for this Apparel Manufacturer are $300 Million. $300/50% = $600 Million Breakeven Point.

6.

Estimate the budgeted profit or loss. Here, as mentioned, the Contribution towards Fixed Costs based on a reasonable sales projection of selling 7812.5 units of each of 8 jackets and 8 pants of 4 colors each at 16 distributors for $150/selling price per unit will total 1,200,000,000 and that our BreakEven Point is $600,000,000. You'll therefore anticipate a profit of $0 on sales of $150*7812.5* 1024 = $1,200,000,000.00, which is a ROS (Return on Sales) of 0%, and a Return on Fixed Costs of $0/300M = 0% -- so you can pretty much roll with seasonal changes every two years and stay right with the fastmoving market of ski fashion, in which there's almost always a role for the high-end warmup pants and jacket customer, and just break even.

7.

7
Understand that every sale made after the $1,200,0000,000 mark is pure profit.If we do increase our marketing efforts to 32 distribution points with sales of $2,400,000,000, we'll make a profit of $600,000,000 -- enough to purchase a new factory, or rather, set of Fixed Costs. The ROS would then be $600M/$2,400M or 25%, and the return to Fixed Costs would be $600M/300M or 200%.
Ad

Add your own method

Name your m

Save

Warnings

The following assumptions usually underlie a given breakeven analysis:

1. The behavior of costs and revenues has been reliably determined and is linear over the relevant range.

o o

2. All costs may be resolved into fixed and variable elements. 3. Fixed costs remain constant over the volume range on the breakeven chart.

o o o o o

4. Variable costs fluctuate proportionally with volume. 5. Selling prices are to be unchanged. 6. Prices of cost factors are to be unchanged. 7. Efficiency and productivity are to be unchanged. 8. The analysis either covers a single product or it assumes that a given sales mix will be maintained as volume changes. Sales mix may be defined as the relative combination of quantities of a variety of company products that compose total sales. If the mix changes, overall sales targets may be achieved, but the effects on profits depend on whether low-margin or high-margin goods predominated in the sales mix.

9. Revenue and costs are being compared on a common activity base (for example, sales value of production or units produced).

10. Perhaps the most basic assumption of all is that volume is the only relevant factor affecting cost. Of course, other factors also affect costs and sales. Ordinary cost-volume-profit analysis is a crude oversimplification when these factors are unjustifiably ignored.

11. Changes in beginning and ending inventory levels are insignificant in amount."

Ccl

ntroduction of C.C.L C.C.L is a subsidiary company of coal India limited under ministry of coal and mines govt. of IndiaC.C.L is one of the 7 coal production subsidiaries of coal india limited under ministry of coaland mines. Company is governed by a board of directors consisting of 5 full time directorsand 6 part time directors. Full time directors are responsible for specific functions of operation, project planning, finance and personnel.India is third largest country in the production of coal.C.C.L means Central Coalfields Limited. 1

Coal India Limited A Profile Coal India limited is the third largest coal producing company in the !orld. It !as formed on "# st $ctober, #%75 as a &olding Company under the ministry of coal, 'ovt. of India, for the entirecoal industry in the country barring the coal mines in (ndhra )radesh and captive mines of *I+C$, II+C$ and ,-C. Its registered office is located at #., /etaji +ubhash 0oad, 1ol2ata. It!as declared )ublic +ector 3nderta2ing in /ovember, #%75 for reorgani4ing the nationali4edcoal mines and ensuring integrated development of coal, the prime source of energy.Coal India presently contributes %.5 of the total coal production in India. It operates through /I/6 subsidiaries7 6I'&* producing companies7 6astern Coalfield Limited 86CL9, +anctoria,:;< ;harat Co2ing Coal Limited 8;CCL9< Central Coalfield Limited 8CCL9, 0anchi =har2hand< /orthern Coalfield Limited 8/CL9, +ingrauli, >)< :estern Coalfields Limited 8:CL9, /agpur,>aharashtra< >ahanadi Coalfields Limited 8>CL9, +ambalpur, $rissa< *he mines of /orth6astern Coalfields Limited 8/6CL9, (ssam >eghalaya<

+outh 6astern Coalfield Limited8+6CL9, ;ilaspur< and Coal >ine )lanning ,evelopment at Institute Limited 8C>),I9.(nd ,an2uni Coal Companies 8,CC9 in :est ;engal operates directly under coal India.Coal India currently operates 5#. mines 8tentatively9 and #5 !asheries spread over nine states to produce and beneficiate coal for meeting the demand of the consumers all over the country. *heranges of products are7 0a! coal 8co2ing and non?co2ing9, :ashed coal, >iddlings, soft co2e &ard co2e, coal, tar, coal gas, coal chemicals etc. 2
hthttp7@@htmlimg#.scribdassets.com@jA7rpAeiof#%4p@images@B? fB.a5#6.Ba.jpgtp7@@htmlimg#.scribdassets.com@jA7rpAeiof#%4p@images@B? fB.a5#6.Ba.jpg

Company Profile ,ate of incorporation Coal India Limited was formed as holdingCompany with 5 subsidiaries on 21.10.1 !5 Corporate +tatus 7 "he #ompany is in#orporated under theCompanies A#t$ 1 5% and is wholly owned bythe &o'ernment of India (&)I*. ;usiness 7 +ngaged in the mining of #oal$ #oal basedprodu#ts and mining #onsultan#y. :holy $!ned+ubsidiaries 6astern Coalfields Ltd.;harat Co2ing Coal Ltd.Central Coalfields Ltd./orthern Coalfields Ltd. :estern Coalfields Ltd . +outh 6astern Coalfields Ltd . >ahanadi Coalfields Ltd . and Central >ine )lanning ,esign Institute Ltd . /orth 6astern Coalfields is dire#tly under CoalIndia Ltd. 0egistered $ffice 7 Coal ;havan,#. /etaji +ubhas 0oad,1ol2ata ? 7.. ..#:est ;engal, India.

I,"+-,AL A.P+C"./+L+&A"I), )0 P)1+CIL eCercise the po!er delegated under ,)6 guidelines to the >$3 signing companies and also po!ers delegated by the ministry of Coal to Coal India Ltd. from time to time. )bligation of the &o'ernment2 In order to enable CIL to achieve its objectives and the level of performance set in the >$3, the'overnment on its part underta2es to7? (ssist CIL in setting adeDuate supply of rail!ay !agons. (ssist CIL in acDuisition of land and getting clearance for forest land by ta2ing up thematter !ith >$6F and the respective state government so that land acDuired under theL ( @ C ; ( ( c t i s h a n d e d o v e r a n d t h e f o r e s t c l e a r a n c e g i v e n u n d e r t i m e b o u n d programmed. (ssist CIL in arranging and getting necessary approval for internal credit. (ssist CIL in recovery of outstanding coal sale due. (ssist CIL in restructuring of 6CL and ;CCL in vie! of report submitted by consultant. 3),I")-I,& CIL has to submit a Duarterly report of performance for each of the performance indicators. *heDuarterly target in respect of indicators is same as reflected in the annual action plan "..#?." of the >inistry of coal. The Performance evaluation is based on its annual performance. P+-0)-3A,C+ -A"I,&24