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INTRODUCTION
1.1 Introduction
Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact
that varying levels of costs and volume have on operating profit. The cost-volume-profit
analysis, also commonly known as break-even analysis, looks to determine the break-even
point for different sales volumes and cost structures, which can be useful for managers
making short-term economic decisions. CVP analysis requires that all the company's costs,
including manufacturing, selling, and administrative costs, be identified as variable or fixed.
Key calculations when using CVP analysis are the contribution margin and the contribution
margin ratio. The contribution margin represents the amount of income or profit the company
made before deducting its fixed costs. Said another way, it is the amount of sales dollars
available to cover (or contribute to) fixed costs. When calculated as a ratio, it is the percent of
sales dollars available to cover fixed costs. Once fixed costs are covered, the next dollar of
sales results in the company having income. Cost-Volume-Profit (CVP) analysis is a
managerial accounting technique which studies the effect of sales volume and product costs
on operating profit of a business. It shows how operating profit is affected by changes in
variable costs, fixed costs, selling price per unit and the sales mix of two or more products.
The CVP analysis uses these two costs to plot out production levels and the income
associated with each level. As production levels increase, the fixed costs become a smaller
percentage of total income while variable costs remain a constant percentage. Cost
accountants and management analyze these trends in an effort to predict what costs, sales,
and profits the company will have in the future. They also use cost volume profit analysis to
calculate the break-even point in production processes and sales. The break-even point is
drawn on the CVP graph where the sales, fixed costs, and variable costs’ lines all intersect.
This is a key concept because it shows management that the revenue from a project will be
able to cover all the costs associated with it. Using a variation of the CVP, management can
calculate the break-even point in profits, units, and even dollars.
The above-mentioned marginal cost equations can be applied to the following heads:
Contribution Margin
Contribution margin is the amount remaining from sales revenue after variable expenses
have been deducted i.e. difference between sales and marginal or variable costs. Thus it is
the amount available to cover fixed expenses and then to provide profits for the period.
The concept of contribution helps in deciding breakeven point, profitability of products,
departments etc. to perform the following activities:
Selecting product mix or sales mix for profit maximization
Fixing selling prices under different circumstances such as trade depression,
export sales, price discrimination etc.
CVP analysis can be used to help find the most profitable combination of variable costs,
fixed costs, selling price, and sales volume. Profits can sometimes be improved by
reducing the contribution margin if fixed costs can be reduced by a greater amount.
The contribution margin as a percentage of total sales is referred to as contribution margin
ratio (CM Ratio). Contribution margin ratio can be used in cost-volume profit
calculations.
1. Profit Volume Ratio (P/V Ratio), its Improvement and Application
The ratio of contribution to sales is P/V ratio or C/S ratio. It is the contribution per rupee
of sales and since the fixed cost remains constant in short term period, P/V ratio will also
measure the rate of change of profit due to change in volume of sales. The P/V ratio may
be expressed as follows:
Sales−Marginal Cost of Sales
P/V Ratio = Sales
Contribution
= Sales
Changes in Contribution
= Changes in Sales
Change in Profit
= Change in Sales
A fundamental property of marginal costing system is that P/V ratio remains constant at
different levels of activity. A change in fixed cost does not affect P/V ratio. The concept
of P/V ratio helps in determining the following:
Breakeven point
Profit at any volume of sales
Sales volume required to earn a desired quantum of profit
Profitability of products
Processes or departments
The contribution can be increased by increasing the sales price or by reduction of variable
costs. Thus, P/V ratio can be improved by the following:
Increasing selling price
Reducing marginal costs by effectively utilizing men, machines, materials and
other services
Selling more profitable products, thereby increasing the overall P/V ratio
2. Breakeven Point
Breakeven point is the volume of sales or production where there is neither profit nor
loss. Thus, we can say that:
Contribution = Fixed cost
Now, breakeven point can be easily calculated with the help of fundamental marginal cost
equation, P/V ratio or contribution per unit.
a. Using Marginal Costing Equation
S (Sales) – V (Variable cost) = F (Fixed cost) + P (Profit)
At BEP P = 0,
BEP Sales – V = F
By multiplying both the sides by S and rearranging them, one gets the following
equation:
Sales at BEP = F. S/S − V
b. Using P/V Ratio
Contribution at BEP Fixed Cost
Sales (S) at BEP = =
P/V Ratio P/V Ratio
c. Using Contribution per unit
Breakeven Point = Fixed Cost/Contribution per unit
3. Margin of Safety (MOS)
Every enterprise tries to know how much above they are from the breakeven point. This is
technically called margin of safety. It is calculated as the difference between sales or
production units at the selected activity and the breakeven sales or production.
Margin of safety is the difference between the total sales (actual or projected) and the
breakeven sales. It may be expressed in monetary terms (value) or as a number of units
(volume). It can be expressed as profit / P/V ratio. A large margin of safety indicates the
soundness and financial strength of business.
Margin of safety can be improved by lowering fixed and variable costs, increasing
volume of sales or selling price and changing product mix, so as to improve contribution
and overall P/V ratio.
Margin of safety = Sales at selected activity – Sales at BEP
Profit at selected activity
= P/V Ratio
Managers use the degree of operating leverage to gauge the risk associated with their cost
function and to explicitly calculate the sensitivity of profits to changes in sales (units or
revenues):
% change in profit = % change in sales x Degree of Operating leverage
Managers need to consider the degree of operating leverage when they decide whether to
incur additional fixed costs, such as purchasing new equipment or hiring new employees.
They also need to consider the degree of operating leverage for potential new products
and services that could increase an organization’s fixed costs relative to variable costs. If
additional fixed costs cause the degree of operating leverage to reach what they consider
an unacceptably high level, managers often use variable costs—such as temporary
labour—rather than additional fixed costs to meet their operating needs.
2.4 Cost Volume Profit (CVP) Relationship in Graphic Form
Apart from marginal cost equations, it is found that the relationships among revenue, cost,
profit and volume can be expressed graphically by preparing a cost-volume-profit (CVP)
graph or break even chart. Breakeven chart and profit graphs, which is a development of
simple breakeven chart and shows clearly profit at different volumes of sales, are useful
graphic presentations of the cost-volume-profit relationship.
Breakeven chart is a device which shows the relationship between sales volume, marginal
costs and fixed costs, and profit or loss at different levels of activity. Such a chart also shows
the effect of change of one factor on other factors and exhibits the rate of profit and margin of
safety at different levels. A breakeven chart contains, among other things, total sales line,
total cost line and the point of intersection called breakeven point. It is popularly called
breakeven chart because it shows clearly breakeven point (a point where there is no profit or
no loss).
2.5 Construction of a Breakeven Chart
The construction of a breakeven chart involves the drawing of fixed cost line, total cost line
and sales line as follows:
1. Select a scale for production on horizontal axis and a scale for costs and sales on
vertical axis.
2. Plot fixed cost on vertical axis and draw fixed cost line passing through this point
parallel to horizontal axis.
3. Plot variable costs for some activity levels starting from the fixed cost line and join
these points. This will give total cost line. Alternatively, obtain total cost at different
levels; plot the points starting from horizontal axis and draw total cost line.
4. Plot the maximum or any other sales volume and draw sales line by joining zero and
the point so obtained.
2.6 Uses of Breakeven Chart
A breakeven chart can be used to show the effect of changes in any of the following profit
factors:
Volume of sales
Variable expenses
Fixed expenses
Selling price
A CVP graph or breakeven chart thus highlights CVP relationships over wide ranges of
activity and can give managers a perspective that can be obtained in no other way.
1. Selecting a scale for the sales on horizontal axis and another scale for profit and fixed
costs or loss on vertical axis. The area above horizontal axis is called profit area and
the one below it is called loss area.
2. Plotting the profits of corresponding sales and joining them. This is profit line.
But then, if a company sells different products having different percentages of profit to
turnover, the original combined breakeven chart fails to give a clear picture when the sales
mix changes. In this case, it may be necessary to draw up a breakeven chart for each product
or a group of products. A breakeven chart does not take into account capital employed which
is a very important factor to measure the overall efficiency of business. Fixed costs may
increase at some level whereas variable costs may sometimes start to decline. For example,
with the help of quantity discount on materials purchased, the sales price may be reduced to
sell the additional units produced etc. These changes may result in more than one breakeven
point, or may indicate higher profit at lower volumes or lower profit at still higher levels of
sales.
All costs are presumed to be classified as either variable or fixed. In the real business
environment however, costs behave differently. Users of CVP analysis need to be able to
identify variable costs from fixed costs, and vice versa. Also, different methods are used to
segregate mixed costs into purely variable and purely fixed.
Variable costs per unit are constant. Total variable cost changes directly with the volume of
activity. On the other hand, total fixed costs remain constant regardless of the level of
activity.
Cost and revenue relationships are linear within a relevant range of activity and over a
specified period of time.
It is assumed that all units produced are sold during the period; hence, there is no change in
beginning and ending inventory levels.
As volume (or level of activity) increases, the total variable cost increases directly with the
change in volume. If the variable cost per unit is, say $5 per unit, the total variable costs
would be equal to $5 multiplied by the number of units produced. It is important to take note
that volume is the only factor affecting total variable costs. The variable cost per unit is
assumed to be constant. Productivity and efficiency concerns are likewise ignored (assumed
constant).
where
C = Unit Contribution (Margin)
Subtracting variable costs from both costs and sales yields the simplified diagram and
equation for profit and loss.
In symbols:
Diagram relating all quantities in CVP.
These diagrams can be related by a rather busy diagram, which demonstrates how if one
subtracts variable costs, the sales and total costs lines shift down to become the contribution
and fixed costs lines. Note that the profit and loss for any given number of unit sales is the
same, and in particular the break-even point is the same, whether one computes by sales =
total costs or as contribution = fixed costs. Mathematically, the contribution graph is obtained
from the sales graph by a shear, to be precise , where V are unit variable costs.
For CVP analysis to be useful the assumptions on which it is based must recognised. These
assumptions set the rules for examining relationships between sales volume, costs and profits.
The conditions which are assumed to apply when CVP analysis is used are presented below.
1.All variables remain constant except volume
This assumption suggests that volume is the only factor that can cause cost and profits
tochange. Factors such as increasing production efficiency, changing sales mix and
pricelevels are not considered.
2.Only one product is being produced or there is a constant sales mix
Following on from the previous assumption, CVP analysis only applies where one product
isbeing examined or if there are a number of products then they are always sold in
sameproportions or combination.
3.Total costs and total revenue are linear functions
This assumption suggests that the variable cost per unit and the selling price per unit do
notchange i.e. they are not affected by discounts.
4.Profits are calculated using variable (marginal) costing
Variable costing facilitates profit analysis as it separates variable and fixed costs and
treatsfixed costs as a period expense rather than attempting to allocate them to products.
5.Costs can be accurately divided into their fixed and variable elements
This is a key requirement of variable costing. The suggestion is that where there are semi-
variable costs, that they can be accurately split by using techniques such as the high-
lowmethod.
6.The analysis applies only to the relevant range
The relevant range is considered to be a sales volume range (E.g. between sales of
10,000units and 80,000 units) within which the selling price and variable cost per unit
remainconstant. CVP analysis does not apply outside of the boundaries of this sales volume
range(i.e. sales less than 10,000 units or greater than 80,000 units).
7.The analysis applies only to a short-term horizon
CVP analysis examines the relationship between sales volume, costs and profit during
theperiod of one year and during this time it is suggested that it would be difficult to
changeselling prices, variable and fixed costs which is in agreement with the other
assumptionsabove.
CHAPTER-FOUR
COST VOLUME PROFIT ANALYSIS OF BSRM
4.1 Cost-Volume-Profit Analysis of BSRM
Cost volume profit analysis is applied specially to identify for break even revenue and for
profit planning. Business organizations are eager to earn profit. Profit planning is the
fundamental aspect of the overall management function. Profit planning can be done only
when the management has the information about the cost of the product, both fixed and
variable cost and the selling price of the product. The cost volume profit analysis is used for
Contribution Margin analysis
The difference between selling price and variable cost (i.e. the marginal cost) is known as
contribution margin. In other words, Fixed cost plus the amount of profit is equivalent to
contribution margin. It can be determined by using the following formula:
Contribution margin = Selling Price Variable Cost Or contribution margin
= Fixed Cost + Profit
Break Even Analysis
The point of sales which breaks the total cost is called break even sales. The break
even point can be identified by using the following formula:
Profit volume ratio establishes a relationship between the contribution and sales volume.
The two factor profit and volume are interconnected and dependent with each other. Profit
depends upon sales; selling price to a great extent will depend upon the volume of
production. It can be determined by using the following formula:
The rise and fall in sales value will have no impact in profit volume ratio as a result break
even point will remain constant. The rise and fall of sales value by 20% will affect the profit
which can be disclosed by using the figures of the fiscal year 2018 are as follows:
BSRM
Income Statement with changes in Sales Value
Changes in Sales Value
Details Original 20% Increase 20% Decrease
Sales Revenue 6172 7406.4 4937.6
Less, Variable Cost 3216 3859.2 2572.8
Contribution Margin 2956 3547.2 2364.8
Less, Fixed Cost 2416 2416 2416
Profit/ Loss 540 1131.2 (51.2)
CM ratio 0.479 0.479 0.479
BEP 5044 5044 5044
Analysis:
The above table shows that the rise in sales value by 20%, will make the company enjoy the
profit. 1131.2 million so it enhances the profit 591.2 million by 109.48%. Similarly, with the
decrease in sales value by 20% the loss will increase by 591.2 million by 109.48%.
4.4 Effect of Changes in Variable Cost
The impact of change in Variable cost on profit is straight forward if it does not cause any
change in sales revenue and fixed cost. An increase in variable cost will lower P/V ratio, push up
the BEP and reduce profit. On the other hand, if the variable cost declines, P/V ratio will
increase, BEP will be lowered and profit will rise. If the increase and decrease in variable cost by
20% with other factor assumed remain constant, it makes effect on profit by using the figures of
the fiscal year 2018.
BSRM
Income Statement with changes in Variable Cost
Analysis:
The above table exhibits that, with 20% increase in variable cost, will BEP increase by
33.81%. Similarly, with the decrease in variable cost by 20% the break even point will
decrease by 13.93%. These instances reveal that variable cost and break even point have
positive and disproportionate relationship.
4.5 Effect of Changes in Fixed Cost
A change in fixed cost does not influence P/V ratio if other factors remain unchanged. Fall in
the fixed cost however lower the BEP and raise the profit. An increase in fixed cost will raise
the BEP. If increase and decrease of fixed cost by 20% with other factor assumed to remain
unchanged, the impact can be analyzed by using the figures of the fiscal year 2018.
BSRM
Income Statement with changes in Fixed Cost
Analysis
The above table disclosed that 20% of fixed cost increase will make break even point up by 20%
and creating profit to reduce by 89.48%. Similarly with 20% decrease in fixed cost, BEP amount
will decrease by the same 20% and profit will go up by 89.48%. From this situation it can be
concluded that fixed cost has direct and proportionate relationship with Break Even Point and
inverse relationship with profit.
4.6 Effect of Changes in Sales Value and Fixed Cost
An increase in sales revenue and decrease in fixed cost increase the net income. If there is an
increase in sales revenue by 20%, and decrease in fixed cost by 500 million Variable cost change
according to the sales revenue, and vice versa, it gets the following results by using the figure of
fiscal year 2018.
BSRM
Effect of Changes in Sales Value and Fixed Cost
Analysis
Above table reveals that, 20% increase in sales revenue and 500(Lac) decrease in fixed cost will
decrease the BEP 20.7%, the profit will rise by 202.07% and CM ratio remain same. Similarly,
by increasing the fixed cost by 500 million and reduce the sales by 20%, it will increase the
BEP by 20.7%, increase the loss by 202.07% and CM ratio remain constant. From this it can
conclude that sales value and fixed cost have no relationship with CM ratio.
4.7 Effect of Changes in Sales Value and Variable Cost
The impact of change in combination of variable cost, and sales value is dynamic. A decrease in
variable cost and increase in sales revenue increase the P/V ratio and net income will rise. If
there is decrease in variable cost by 10%, and increase in sales revenue by 10%, fixed cost
remained constant and vice versa, it gets following results by experimenting on the figure of the
fiscal year 2018.
BSRM
Income Statement with Changes in Sales Value and Variable Cost
Analysis
Above table reveals that, 10% decrease in variable cost and 10% increase in sales value and
other factor remain unchanged will decrease the BEP by 16.55% and increase the CM ratio by
19.83%, and increase the profit by 173.85%. Similarly, by increasing variable cost by 10% and
reduce the sales by 10% and it will increase the BEP by 31.65%, decrease CM ratio by 24.22%
and increase the loss by 173.85% respectively.
4.8 Effect of Changes in Variable Cost and Fixed Cost
A change in fixed cost does not influence P/V ratio, but changes in the variable cost affect the
P/V ratio. Increase in variable cost and decrease in fixed cost will decrease the CM ratio and
similarly profit will also influence. If increase in variable cost by 10% and decrease the fixed
cost by 600 million and vice versa will have the following results on the figure of fiscal year
2018.
BSRM
Effect of Changes in Variable Cost and Fixed Cost
Changes in Variable Cost and Fixed Cost
Details Original 10% Increase 10% Decrease
Sales Revenue 6172 6172 6172
Less, Variable Cost 3216 3537.6 2894.4
Contribution Margin 2956 2634.4 3277.6
Less, Fixed Cost 2416 1816 3016
Profit/ Loss 540 818.4 261.6
CM ratio 0.479 0.427 0.531
BEP 5044 4252.93 5679.85
Analysis
Above table reveals that increase in variable cost and decrease in fixed cost will decrease the
CM ratio by 10.86% as a result profit increase by 51.56% and decrease the BEP by 15.68%. But
decrease in variable cost and increase in fixed cost will increase the CM ratio by 10.86%,
increase the BEP by 12.65% and decrease the profit by 51.56% respectively.
4.9 Effect of Change in Variable Cost, Fixed Cost and Sales Value
The impact of change in combination of variable cost, fixed cost and sales value is dynamic. An
increase in variable cost for improving the quality of service will raise the sales value and if the
fixed cost will reduce by adopting cost control measure then P/V ratio and BEP will decrease
respectively but net income will rise.
BSRM
Income Statement with Changes in Sales Value, Variable Cost and Fixed Cost
Changes in Sales Value, Variable Cost and Fixed Cost
Details Original Increase Decrease
Sales Revenue 6172 7406.4 4937.6
Less, Variable Cost 3216 3537.6 2894.4
Contribution Margin 2956 3868.8 2043.2
Less, Fixed Cost 2416 2016 2816
Profit/ Loss 540 1450.7 (772.8)
CM ratio 0.479 0.522 0.414
BEP 5044 3862.07 6801.93
Analysis:
Above table reveals that, 10% increase in variable cost and 20% increase in sales value but
decrease in fixed cost by 400 million will decrease the BEP by 23.43% but CM ratio and
profit increase by 8.98% and 168.65%. Similarly, by reducing variable cost by 10% and
increasing in fixed cost by 400 million will reduce the sales by 20% and it will increase the
BEP by 34.85% but decrease CM ratio by 13.57% and Profit by 243.11% .
4.10 CVP Analysis and Uncertainty
The organization may be failure to cover the fixed cost in the long term which can result in the demise of
any organization, if much attention is given to the traditional CPV model (which ignores uncertainty).
The basic CPV model is not adequate, bearing the decision making process. If one or more variable of the
CVP analysis are subject to uncertainty, the management should analyze the potential impact of this
uncertainty. This additional analysis is required in evaluating alternative course of action and in
developing contingency plan.
CHAPTER-FIVE
CHALLENGES OF COST VOLUME PROFIT ANALYSIS
5.1 Challenges of Cost Volume Profit Analysis
Multiple Products
Human Error
CVP analysis allows the manager to plug in variable costs to establish an idea of future
performance, within a range of possibilities. This, however, can be a disadvantage to
managers who are not detail-oriented and precise with the data they record. Projections
based on cost estimates, rather than precise numbers, can result in inaccurate projections.
Limited for Multi-Product Operations
The CVP approach to analysis is beneficial, but it is limited in the amount of information
it can provide in a multi-product operation. Much of the analysis that is done by business
managers who use this approach is done based on a single product. Multi-product
businesses, such as restaurants, can have a difficult time with CVP analysis because
menu items, for instance, are likely to have many variable cost ratios. This makes the
challenge of CVP analysis all the more difficult because it must be done for each specific
product.
Fixed costs will not change at all levels of sales within the assumed relevant range of
activity.
Selling price per unit remains constant.
Variable costs vary in direct proportion to changes in activity i.e. as a percentage of
sales revenue. They remain constant.
The sales mix is assumed to remain constant if more than one product is sold.
The projections are over a short period of time only.
Manufacturing Products
Approximations with CVP
Even though CVP analysis is based on specific data and requires tremendous attention to
detail, the best that it can do is provide approximate answers to questions, rather than
ones that are exact. It answers hypothetical questions better than it provides actual
answers for solving problems. It leaves the business manager to decide how to act on the
CVP analysis data he has at hand.
Understandability
For the most part, CVP analysis is free of accounting jargon and complex terminology.
This makes both the preparation and interpretation of CVP analysis figures
understandable. For example, you might want to know how many individual units of your
company's product you would need to sell to break even for the year.
Merchandising Products
Inflexibility
As part of it being quick and easy to use, CVP analysis has a built-in set of assumptions
that are fairly rigid. For example, CVP analysis assumes that a company sells one
product, or that if it sells multiple products the proportion of how much of each product is
sold remains constant. This is known as a constant sales mix assumption, and many
businesses do not follow this sales pattern. For example, a restaurant probably sells more
hot drinks in the winter than it does in the summer, and these drinks could have different
cost assumptions.
CVP analysis is based on a number of simplistic assumptions about cost behaviour which
undermine the model’s effectiveness.
Costs can be divided into fixed and variable costs but in reality many costs have a fixed
and variable element(semi-variable) and may not be easy to divide.
There is a linear relationship between output and costs and revenues. The economists
view tends to dispute this and presents a curvilinear model.
The business has only one product or there is a specific constant product mix.
The only factor influencing costs and revenues is output. Other factors such as production
efficiency and production methods may impact on output
Service orientated Products
Segregation of total costs into its fixed and variable components is difficult to do.
Fixed costs are unlikely to stay constant as output increases beyond a certain range of
activity.
The analysis is restricted to the relevant range specified and beyond that the results can
be unreliable.
Besides volume, other elements like inflation, efficiency, capacity and technology can
affect costs.
Impractical to assume sales mix remain constant since this depend on the changing
demand levels.
The assumption of linear property of total cost and total revenue relies on the assumption
that unit variable cost and selling price are constant. However, this is likely to be valid
within relevant range only.
Fixed costs can only remain fixed within the relevant range and cannot therefore be
constant when the firm operates outside the relevant range.
Costs cannot be entirely classified between variable and fixed because there are always
costs that have characteristics of both.
The selling price and variable cost per unit cannot remain constant because the firm may
offer discounts to customers while variable costs may increase due to inflation, or reduce
due to discounts from suppliers.
The firm will not always produce units using the same technology and therefore changes
are always anticipated in the production process which changes will affect the operating
capacity of the firm. The firm can either produce more than or less than the budgeted
units.
CHAPTER-SIX
OVERCOME THE CHALLENGES OF COST VOLUME PROFIT ANALYSIS.
6.1 Overcome the challenges of cost volume profit analysis.
On the basis of the study of CVP analysis as a tool to measure effectiveness of PPC of BSRM, it
seems necessary to make CVP analysis effective is stepping towards globalization with
membership of WTO. Nepalese companies should integrate with the global environment with best
fit managerial strategies. As the competition is very high in the context of liberalization, every
company should give attention on cost minimization rather than profit maximization. For this,
CVP analysis tools can be great help. Thus, the following recommendations can be endorsed
based on the finding of research study:
Multiple Products
Cost planning and controlling should focus on the relationship between cost and
benefits rather than incurring cost in order to heighten revenue.
Classification of cost into variable and fixed as well as controllable and non-
controllable must be made within specific framework of responsibility center
and time.
Expenses planning & controlling should focus on the relationship between
expenditure and benefits derived from those expenditure.
BSRM should consider BEP analysis while preparing revenue plan, operation
plan and setting price of its services.
Separate cost control department should be established for the effective
management of cost.
Manufacturing Products
As BSRM is service providing company, more emphasis should be given on
reducing the variable cost ratio which means try to focus on cost –minimization.
The company must increase revenue in order to generate more profit, because
high fixed cost can make a huge loss and also high operating risk.
The overall problem with break-even as a decision making process tool is that it is
based on using predicted figures. There is no certainty that costs and prices will be
accurate or constant.
The direct or variable costs may change, depending upon the quantities involved.
A new diagram/table may have to be have drawn, which is time-consuming.
As the level of production increases, the opportunities to gain the benefits of
economies of scale with affect unit costs.
If there is more than one product involved, it may be difficult to allocate the fixed
costs. Calculating the break-even may be difficult.
Calculating the total revenue relies on just one price. In business, this is unlikely as
discounts or promotional offers may be used.
Conclusion
Different types of profit planning tools, which are used in the academic field and in
multinational companies of developed nation, are not found applied by BSRM CVP analysis is
not effectively applied by BSRM, because of no implementation of scientific method of
segregating cost into fixed and variable, which is the hardcore of CVP Analysis. The company
has not implemented costing and cost classification policy. Due to this reason the accumulation
and apportion of cost on the basis of responsibility center is not done by the company. That’s
why it becomes practically difficult to define cost on the basis of activity and to classify it on
the basis of variability. Therefore, BSRM has not been able to use efficiently and effectively
CVP analysis and make the realistic budget. As the little variation in sales target and actual
sales proves that the Sales planning of the company is scientific. Profit pattern of the company
shows that the company is ineffective in the profit planning and its implementation. The cost
structure of BSRM discloses appropriate variable cost and fixed cost so this cost structure
indicates the normal risk because its fixed cost are normal and it will bear normal loss as
rapidly as sales falls off. The CVP analysis exhibits that the variable cost ratio is decreasing
which means the company’s CM ratio is increasing more than the sales increases. BEP of the
company has decreased and its main reason is due to increase in CM ratio and fluctuation in
fixed cost. As the higher BE sales, the business of the company is in high operating risk, and so
further investment in this condition is not safe. The “what- if” analysis shows that the changes
in either sales revenue or variable cost alter the CM, CM ratio or BEP whereas response of
change in fixed cost are highly stimulus. The MOS of the company is negative so a percentage
decrease in sales can lead to the company to collapse but company is able to recovered that and
able to maintained positive MOS which shows that actual sales is higher that BEP sales.
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