COST-VOLUME-PROFIT
ANALYSIS
, CVP analysis examines the relationship between changes in output and changes in total
sales revenue, costs and profit.
IMPORTANT ASSUMPTIONS:
•Either a single product is being sold or if a range of products are being sold the sales
mix remains constant.
•Profits are calculated on the variable costing basis (i.e. fixed costs are treated as period
costs). If absorption costing is used it is necessary to assume that production is equal to
sales (i.e. there is no opening or closing inventory).
•The analysis is appropriate only for decisions taken within the relevant production
range. The relevant range is the normal operating range of the organisation, within
which the cost behaviour is known. If you produce outside of the relevant range the
cost structure of the company changes.
Example:
Castle Limited manufactures bicycles and tricycles. The following budgeted information is available for
the 20X6 financial year:
Bicycles Tricycles
Direct material R400 R300
Direct labour R250 R200
Variable manufacturing overhead R120 R80
Sales commission R60 R40
Selling price R1 200 R800
Units Units
Annual demand 15 000 18 000
Other budgeted costs for the 20X6 year: Based on budgeted
Fixed manufacturing overheads R580000 figures (used for
Fixed selling & administrative costs R320 000 planning and
budgeting) unless you
REQUIRED
are specifically asked to
Calculate the breakeven point in units for the 20X6 financial year. calculate the actual
Calculate the breakeven point in Rands for the 20X6 financial year. breakeven point!!
ANALYSIS
, CVP analysis examines the relationship between changes in output and changes in total
sales revenue, costs and profit.
IMPORTANT ASSUMPTIONS:
•Either a single product is being sold or if a range of products are being sold the sales
mix remains constant.
•Profits are calculated on the variable costing basis (i.e. fixed costs are treated as period
costs). If absorption costing is used it is necessary to assume that production is equal to
sales (i.e. there is no opening or closing inventory).
•The analysis is appropriate only for decisions taken within the relevant production
range. The relevant range is the normal operating range of the organisation, within
which the cost behaviour is known. If you produce outside of the relevant range the
cost structure of the company changes.
Example:
Castle Limited manufactures bicycles and tricycles. The following budgeted information is available for
the 20X6 financial year:
Bicycles Tricycles
Direct material R400 R300
Direct labour R250 R200
Variable manufacturing overhead R120 R80
Sales commission R60 R40
Selling price R1 200 R800
Units Units
Annual demand 15 000 18 000
Other budgeted costs for the 20X6 year: Based on budgeted
Fixed manufacturing overheads R580000 figures (used for
Fixed selling & administrative costs R320 000 planning and
budgeting) unless you
REQUIRED
are specifically asked to
Calculate the breakeven point in units for the 20X6 financial year. calculate the actual
Calculate the breakeven point in Rands for the 20X6 financial year. breakeven point!!
