Managerial Accounting: Breakeven Analysis for Single and Multi-Product Firms, Appunti di Sales management

Scarica Managerial Accounting: Breakeven Analysis for Single and Multi-Product Firms e più Appunti in PDF di Sales management solo su Docsity! Managerial Accounting Helena NAFFA, PhD Department of Finance 22nd September, 2016 Cost Volume Profit Analysis (CVP) Breakeven analysis Single product breakeven analysis Multi product breakeven analysis Limitations Drawing the breakeven chart •Step 1: select appropriate scales for the axes and draw and label them. Vertical axis: the furthest point will be monthly sales revenue= 1,700 units X €50= €85.000 Horizontal axis: monthly sales volume of 1,700 units •Step 2: draw the fixed cost line and label it. It will be parallel to the horizontal axis at €20,000 level. The fixed costs are incurred in the short term even with zero activity. •Step 3: draw the total cost line and label it. To this, calculate the total costs for the maximum sales level, which is 1,700 units: Total costs= Fixed costs + Variable costs Fixed costs: € 20,000 Variable costs for 1,700 units: 1,700 X €30 = € 51,000 Total costs: € 71,000 •Step 4: draw the revenue line and label it. The revenue at maximum activity is €85,000. This point can be joined to the origin. • •Step 5: Mark any required information on the chart and read off solutions. Accurateness of the chart can be checked by reading off the breakeven point and compare that to the calculated breakeven value: • Breakeven point in units = Fixed costs / Contribution per unit • = 20,000/(50-30) = 1,000 units. • The margin of safety can be seen as the area to the right of the breakeven point up to the forecast sales level of 1,700. The contribution breakeven chart 50000 60000 70000 80000 90000 Breakeven point Fixed cost Contribution 0 10000 20000 30000 40000 Sales Revenue Total Cost Variable cost Number of units The profit-volume chart • This chart plots a single line depicting the profit or loss at each level of activity. The main advantage of the profit-volume chart that it is capable of depicting clearly the effect on profit of any changes in the variables. The profit-volume chart Breakeven point 10 A 5 Profit Loss si v 5 1,200 1,600 Number of units Weighted average C/S ratio Company „A” produces Product X and Product Y. Fixed overhead costs are €200,000 every year. Further budgeted information is as follows: Product X Product Y Sales price €50 €60 Variable cost €30 €45 Contribution per unit €20 €15 Budgeted sales (in units) 20,000 10,000 Calculate the Breakeven revenue for next year. Solution step by step: Weighted average C/S ratio = Total contribution /Total revenue Total contribution = 20,000X €20 + 10,000X €15 = € 550,000 Total revenue = 20,000X €50 + 10,000X €60 = € 1,600,000 Weighted average C/S ratio = €550,000/€1,600,000= 34,375% Breakeven revenue: Breakeven revenue = Fixed costs / Weighted average C/S ratio Fixed costs = €200,000 Weighted average C/S ratio = 34,375% Breakeven revenue = €200,000/ 0,34375 = €581, 819. Notice: The calculated Breakeven revenue is only an estimated information because we made the assumption that products X and Y are sold in a constant mix of 2X to 1Y. In reality this is very unlikely to exist, sometimes more Y are sold than X etc. so the actual breakeven point will be different than the anticipated one. Margin of safety calculations A company produces three products, the X, the Y and the Z. Information concerning the products can be seen in the table below: Product X Product Y Product Z Normal sales mix (units) 2 2 1 Selling price/unit €9 €7 €5 Variable cost/unit €6 €5 €1 Contribution/unit €3 €2 €4 Forecast unit sales 400 400 200 Calculate the margin of safety using 3 different approaches. Solution – Margin of safety Product X Product Y Product Z Total Sales revenue €3600 €2800 €1000 €7400 Variable cost €2400 €2000 €200 €4600 Contribution €1200 €800 €800 €2800 Fixed costs - - - €2000 Profit - - - €800 Approach (1): consider the products in sequence, X, then Y, then Z. Breakeven occurs at 800 units of sales (400X and 400Y) so the margin of safety is 200 units of Z. Approach (2): consider the output in terms of € sales and assume a constant product mix of 2X:2Y:1Z. It can be calculated that €1 sales is associated with €0.6216 variable costs. Consequently the contribution per €1 sales is €0,3784. If fixed costs are €2000 then the breakeven point is €5,285 sales and the margin of safety is €2,115 (i.e: €7400 forecast sales - €5,285). Approach (3): consider output in terms of percentage of forecast sales and assume the product mix constant. It can be calculated that 1% of forecast sales is associated with a contribution of €28. If fixed costs are €2000 then the breakeven point is 71.43% and the margin of safety is 28.57%. Step (3): Draw the line „km”, which represents the profit earned by product X (the most profitable). The slope of „km” is determined by the contribution per unit earned on sales. Profit earned k Sales revenue V m Step (4): draw the line „mn”, that represents the profit of product Y (2nd most profitable) . Then draw line „nj”, which represent the profit of product Z. Profit earned n j Sales revenue m k V Step (5): draw the line joining points „k” and „j”, which will represent average profitability. Each point on this line represents the profit earned for the associated output assuming a constant product-mix. Profit earned n j V Sales revenue k m Breakeven point B