Cost Volume Profit (CVP) Analysis | Break-Even Analysis | Explained with Example

Summary

In this video, the Cost Volume Profit (CVP) analysis, also known as break-even analysis, is explored through an example with the fictional company, Tomcod Limited. The tutorial guides you through calculating break-even levels in units, desired profit targets, margin of safety, and break-even points in monetary terms for different years. It emphasizes how changes in costs and sales prices affect profitability, demonstrating detailed calculations and adjustments for changes in price and cost expectations for future projections.

Highlights

• Learn to calculate break-even point in units and currency for different scenarios. 📈
• Example focuses on a fictional company, Tomcod Limited, to demonstrate concepts. 🏢
• Explore the impact of a 10% sales price increase and a 20% variable cost increase on profitability. 📈
• Detailed explanation of margin of safety and its importance for financial stability. 🔍
• Break-even analysis adjusted for expected 2020 changes, making it a future-ready tool. 🔮

Key Takeaways

• CVP analysis helps determine the impact of cost and volume changes on profitability. 📊
• Break-even point: the stage where total costs and total revenue are equal, meaning no profit or loss. ⚖️
• Sales price increases or reductions in variable costs improve the margin of safety. 🚀
• Adjusting fixed and variable costs directly affects required sales to reach profit targets. 💰
• Understanding CVP is crucial for making strategic financial decisions. 🎯

Overview

The tutorial dives deep into Cost Volume Profit (CVP) analysis, presenting its significant role in strategic financial management. Through an in-depth breakdown, it explains how to calculate break-even points and predict profitability based on changing cost parameters, making it invaluable for business insights.

Using Tomcod Limited as a case study, the video effectively illustrates the application of CVP analysis in real-world business scenarios. Viewers are guided step-by-step to understand various elements such as the break-even threshold, margin of safety, and the sales needed to achieve target profits.

Projected changes for 2020 are evaluated, showcasing the sensitivity of CVP analysis to variables such as price adjustments and cost variations. This foresight enables businesses to strategically plan for optimal financial outcomes, demonstrating the practical benefits of mastering these analytical skills.

Chapters

• 00:00 - 00:30: Introduction to CVP Analysis The chapter introduces Cost-Volume-Profit (CVP) Analysis, commonly known as break-even analysis. It explains the purpose of CVP analysis, which is to determine how changes in costs and sales volume affect a company's profitability. The lesson also includes an example that demonstrates how to calculate the break-even volume.
• 00:30 - 01:00: Example Scenario: Tomcod Limited The chapter 'Example Scenario: Tomcod Limited' discusses the process of CVP (Cost-Volume-Profit) analysis through an example involving a fictional company, Tomcod Limited. This company specializes in office stationery and is currently analyzing its folder manufacturing division in 2019. The example aims to teach the reader how to calculate the break-even sales units, understand the break-even rent amount, determine the number of units to sell for a desired level of profit, and calculate the margin of safety. The chapter emphasizes enabling readers to perform CVP analysis independently whenever required.
• 01:00 - 03:00: Break-even Level in Units for 2019 The chapter titled 'Break-even Level in Units for 2019' discusses the financial metrics related to the production and sale of folders in 2019. It explains that each folder is sold for $45, with a variable cost per unit and fixed manufacturing costs amounting to $15,000. Additional fixed costs total $12,000. The total sales for the year reached $90,000. The chapter also covers expected changes for 2020, including a 10% increase in selling price, a 20% increase in variable costs, and adjustments in fixed manufacturing costs.
• 03:00 - 04:30: Target Profit Units for 2019 The chapter titled 'Target Profit Units for 2019' focuses on financial requirements and calculations for a business year. It first addresses the necessary break-even level in units for the year 2019. Following this, it questions how many folders need to be sold to achieve a target profit of twenty-one thousand rand. Additional financial metrics such as the margin of safety value and percentage are also explored. Lastly, the forecasted break-even point for the year 2020 in terms of currency (rands) is also highlighted.
• 04:30 - 06:30: Margin of Safety Value and Percentage The chapter discusses the concept of 'break-even point' in terms of units. It explains that the break-even point is a state where there is neither profit nor loss. The break-even unit is the quantity of units that need to be sold to reach this point, ensuring no financial loss and no profit is gained.
• 06:30 - 15:00: Break-even Point in Rand for 2020 This chapter discusses the concept of the break-even point, specifically in the context of the year 2020. It emphasizes the importance of reaching a break-even point, where the business neither makes a profit nor incurs a loss, allowing it to cover all fixed costs and other expenses. The chapter introduces the formula for calculating the break-even level in units, which is essential for determining at what level the net profit will be zero. Although it mentions a requirement to calculate this for 2019, the focus remains on understanding the break-even point for 2020.

Cost Volume Profit (CVP) Analysis | Break-Even Analysis | Explained with Example Transcription

• 00:00 - 00:30 welcome to contacts in this lesson we are going to be looking at the cost volume profit analysis otherwise known as the CVP analysis or break-even analysis so why do we do this well CVP analysis helps us determine how changes to costs and volumes affect profitability and we'll see how that works right now and why what I'm going to do in this lesson well the example that follows will show how to calculate break even volume that is the break-even
• 00:30 - 01:00 sales units break-even value that is the break-even rent amount and the units to sell for a desired level of profit and the margin of safety so that is what we're going to look at in this example and after this example I'm pretty sure you should be able to do the CVP analysis by yourself whenever you are required to so let's look at this example it's all the tomcod limited is a business specializing in office stationery they are currently analyzing their folder manufacturing division in 2019
• 01:00 - 01:30 folders are sold at forty five grand each the variable cost to manufacture each folder is perjurer and each fixed manufacturing costs are fifteen thousand and each other fixed costs are twelve thousand rent the total sales for the year amounted to ninety thousand rain we also told that the following changes I expected in 2020 selling price will increase by ten percent variable costs increased by twenty percent fixed manufacturing cost
• 01:30 - 02:00 declined by ten percent and other fixed costs remains the same as 2019 so what are we required to do well here are the requirements the first one is what is the break-even level in units for 2019 the second question is how many folders must be sold in 2019 if the target profit is twenty one thousand ran the third one is what is the margin of safety value and percentage and the fourth requirement is what is the break-even point for 2020 in rents so
• 02:00 - 02:30 let's look at the first one what is the break-even level in units between 19 now what is the break-even level or what is the break-even units what is the break-even point why do we do it well the break-even point is the point at which we are not making a profit and we are not making a loss so it's where we break even so we are neither making a profit no a loss so the break-even unit is the amount of units that we need to
• 02:30 - 03:00 sell for us to break-even fast to be never making a profit not a loss so for it's just for us to be able to pay for all our fixed costs and other expenses and our net profit would be at zero so that is why we do the break-even level one the level at which our net profit will be at zero so how do we calculate the break-even level in units as we are required to do for 2019 well here's the formula for the break-even units it's
• 03:00 - 03:30 fixed costs divided by the contribution per unit fixed costs divided by the contribution per unit so let's begin with this what is our fixed costs well we're told that the fixed manufacturing costs are fifteen thousand Ren and other fixed costs are twelve thousand Ren so I'm going to add a lot of fixed costs together so we'll take the fifteen thousand men plus the twelve thousand and we get the total fixed cost of twenty seven thousand Ren so this is the fifth cost that we are going to divide by the contribution per unit but what is
• 03:30 - 04:00 the contribution per unit we are given the sales price per unit which is 45 Ren and we are also given the variable cost per unit which is the trend each so we know that the variable cost per unit is the combination of your direct material and your direct labor and other variable costs that you might have so it's mainly direct labor and direct material so if that's your that's what you have in your question you will know that there is your those are your variable costs but
• 04:00 - 04:30 we are told that the variable cost experian per unit so I wouldn't get the contribution per unit well the contribution per unit is sales price per unit minus variable cost per unit which is 45 REM sales price per unit - the Tutera and vary cost per unit we get the contribution per unit of 15 rent so now that we have our fixed costs and we have our contribution per unit we do the calculation our break-even units equals 27 thousand grand which is the fixed costs - the 15 grand which is the
• 04:30 - 05:00 contribution per unit so our answer is 1,800 units what does that mean well it means that if we sell 1,800 units we will have a net profit of 0 that means we'll never be making a loss no would we be making a profit and that is what the break-even units mean so just under the first one let's look at the second requirement we asked how many orders must be sold in 2019 is the target profit is 21,000 rent so this question
• 05:00 - 05:30 simply says that want to make a profit of 21,000 ran so how many fathers do we need to sell or how many units we need to sell for us to achieve that profit well here's the formula target sales units equals the fixed costs the total fixed cost that is plus the target said profit or how much profits we want to make divided by the contribution per unit so you can see it's very similar to the break-even units but here we're just
• 05:30 - 06:00 adding the targeted profit to the fixed costs so let's do that targeted sales equals 27 thousand grand which is our total fixed costs plus 21,000 brand which is our targeted profit divided by the contribution per unit which you calculated in our first requirement which is 15 grand and it gives us three thousand two hundred units what does that mean it means that if we said three thousand two hundred units we will be able to make a profit of 21,000 grand so that we have just
• 06:00 - 06:30 done as the second requirement let's look at the third one we are asked what is the margin of safety value and percentage so we are asked to do two things to calculate the margin of safety value and calculate the margin of safety percentage well the first question is what is the margin of safety well the margin of safety is the amount of sales that exceed the break-even point or the amount of sales a company can afford to lose on before
• 06:30 - 07:00 it stops being profitable so in essence it's the difference between the break-even value and the sales value the break-even vendee and the sales value so it's how much more sales we have made over the break-even value or the break-even point and here's a note that I put in brackets here the higher the margin of safety the better it is for the company because there is a greater gap which in crow feasibility and lost
• 07:00 - 07:30 or there's a higher gap between the profits we have made and the break-even point which is good for the company so let's do this requirement what is the margin of safety value let's do that one first before we do the percentage well here's the formula for the margin of safety value the margin of safety value equals the actual sales value or the actual sales value in rent minus the break-even value in rents so what is the actual sales value well we're given the actual sales value of
• 07:30 - 08:00 90,000 ran but what is our break-even value well remember we are calculated they break-even in units right so now we need to calculate the break-even value and the break-even value of the break-even sales equals to 1,800 units which is the break-even units which we are calculated in our first requirement multiplied by the sales price per unit and it will give us a break-even value or the break-even sales of 81 thousand
• 08:00 - 08:30 Rand now the question is what is the margin of safety value well we have the formula so we plug in the 90 thousand rand which is the actual sales value which we are given over here - the H 1000 r n which is the break-even sales and it gives and it gives us imagine of safety value of 9000 Wren that means our sales exceed our break-even value or break-even sales by 9000 rent and that is what we are calculating this well
• 08:30 - 09:00 let's give a second one we are told to calculate the margin of safety value which we have just done and the margin of safety percentage so how do you calculate the margin of safety percentage well that's when it's also found simple the margin of 60 percentage equals the margin of safety value divided by the sales value the margin of safety value divided by the sales value when we have just calculated this margin of safety value which is 9000 Ren and we have the sales value of 90,000 Ren so you can see that our
• 09:00 - 09:30 margin of safety percentage is 10% 9000 rent which is the margin of safety value divided by the sales value which is the 90,000 their land and gives us imagine of safety percentage of 10% that means from what we have made sales of we only have wiggle room of 10% of our sales force by more than 10% we will be making a loss and that is why we do the imagine of safety so let's look at the last
• 09:30 - 10:00 requirement number 4 we are asked what is the break-even point for 2020 in the lens well we have just done everything for 2019 that were asked to do and we are told that the following changes I expected in 2020 the sales price will increase by 10% a variable costs increase by 20% fixed manufacturing costs decline by 10% and other fixed costs remain the same as in 2019 so what
• 10:00 - 10:30 is the break-even point for 2020 in Ren's remember the first requirement was what is the break-even point in the unit's now who want the break-even point in rennes so how do we do that well the break-even point in Ren's equals the fixed costs the total fixed cost that we have divided by the contribution margin ratio so let's look at both of those well let's first calculate our selling price per unit our variable cost per unit
• 10:30 - 11:00 our contribution per unit and our fixed costs taking into account these changes that will happen in 2020 well what is our selling price per unit taking into account these changes we were told that the selling price we he's by 10% so we have to increase this for a fiver and per units by 10% so our sales price per unit equals 245 rent time is the 1.1 which is 100 percent plus the 10 percent on top of it it gives us a new selling price for 2020 or
• 11:00 - 11:30 49 grand 50 cents so we have just done that one let's look at the variable cost per unit with the increase our variable cost per unit in 2019 was that see rent but in 2020 is going to have an increase of 20 percent so it's 39 times 1.2 it gives us a variable cost per unit in 2020 of 36 rent now what is our contribution per unit well we know that our contribution per unit equals our selling price per unit minus our
• 11:30 - 12:00 variable cost per unit and it gives us a contribution per unit of the tendrán 50 cents so we have just gotten our contribution per unit now the question is what is our new v costs we're told that our fixed manufacturing costs declined by 10% so fixed manufacturing cost we take 100% minus 10% gives us 0.9 or 90 percent times the 15,000 ran for the fixed manufacturing cost we have a new fixed manufacturing cost in 2020 of
• 12:00 - 12:30 13,500 rent now if we add up our fixed costs together it's 13,500 rent for 6 minutes add shearing cost plus other fixed costs which will remain the same as we are told of 12,000 rent because we are given here at the beginning and should remain the same so it does not increase nor decrease and we get total fixed costs of 25,500 rent so we have our total fixed
• 12:30 - 13:00 costs or the new total fixed costs we have our contribution per unit of the children 50 now what is our contribution margin ratio well for us to get our contribution margin ratio we take our contribution per you / the sales price per unit so our contribution per unit / sales price per unit and we get our contribution margin ratio of twenty seven point two seven percent or zero point two seven two seven now that we have everything we
• 13:00 - 13:30 need we take our formula for break-even point in rennes of fixed costs which is twenty five thousand five hundred grand divided by the contribution margin ratio which is zero point two seven to seven or twenty seven point twenty seven percent and we get ninety three thousand five hundred grand and obviously they will be rounding off differences of a few ends but that does not matter much and that is how it has laid our break-even point
• 13:30 - 14:00 in rams arisen it was a long process is because of these changes that happen but if your question has no changes of the prices or the costs then you can just plug the figures in and you'll be able to get your break-even point in rennes now as a last point for this requirement there's another one can tell hit our break-even point in rents and this is the formula it's our break-even units multiplied power sales price per unit our break-even units multiplied by our
• 14:00 - 14:30 sales price per unit so remember we had calculated our breakeven unit in our first requirement and we got one thousand eight hundred units so let's get our break-even units and multiply that by our sales price per unit well we know that our break-even units equals the fixed costs divided by the contribution per units so let's take this into account the twenty five thousand five hundred reneges office cost divided by the contribution per
• 14:30 - 15:00 unit of the children fifty cents and we get our breakeven in units and you multiply that by the sales price per unit of forty nine hundred and fifty Cent and we get the same answer ninety three thousand five hundred ran as we did here so these are the two ways you can calculate or you can get your break-even point in ignorance or the break-even valley it's the first only the fixed costs divided by the contribution margin ratio and the second one is the break-even units multiplied by the sales price per
• 15:00 - 15:30 unit and there is how we do the CVP analysis or the cost volume profit analysis if this video has made sense to you if you have gained value from this lesson please consider subscribing to our channel liking this video and sharing it if you can till next time Cheers