In this section we look at two areas:
- Break even analysis
- Marginal analysis
In this section we look at two areas:
– Break even analysis
– Marginal analysis
Contribution to sales ratios and breakeven points:
Cost-Volume-Profit (CVP) analysis
CVP analysis makes use of the contribution concept in order to assess the following measures for a single product:
– Contribution to sales (C/S) ratio
– Breakeven point
– Margin of safety
(Contribution = selling price less all variable costs)
C/S ratio:
The C/S ratio of a product is the proportion of the selling price that contributes to fixed overheads and profits. It is comparable to the gross profit margin. The formula for calculating the C/S ratio of a product is as follows:
The C/S ratio is sometimes referred to as the P/V (Profit/Volume) ratio.
Breakeven point:
The breakeven point is the point at which neither a profit nor a loss is made.
– At the breakeven point the following situations occur.
Total sales revenue = Total costs, i.e., Profit = 0
or
Total contribution = Fixed costs, i.e., Profit = 0
– The following formula is used to calculate the breakeven point in terms of numbers of units sold.
• It is also possible to calculate the breakeven point in terms of sales revenue using the C/S ratio. The equation is as follows:
Margin of safety:
The margin of safety is the amount by which anticipated sales (in units) can fall below budget before a business makes a loss. It can be calculated in terms of numbers of units or as a percentage of budgeted sales.
The following formulae are used to calculate the margin of safety:
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