Home » **VOLUME COST PROFIT ANALYSIS**

VCP Analysis and a Segment of the Business
The fundamental approach of applying the VCP analysis to a segment of the business is the same as applying it to the business as a whole. The VCP approach may he applied to problems relative to individual product lines, territories, methods of sale, channels of distribution or any particular segment of the business which is under security. In all these decisions, fixed

Effects of Multiple Changes
So far we have assumed that a change takes place in one of the three variable affecting profits – cost, price and sales volume. In cases where more than one factor is affected, the BEP analysis can he applied as shown below:
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Effect of Changes in Variable Costs
Assuming an increase of VC by Re 1 a unit for SV Ltd the new contribution margin will be: Rs 3 (Rs 10 – Rs 7) and the revised P/V ratio 0.30 that is. (Rs 3 + Rs 10).
Revised BEP = (Rs 26,(00)/0.30 = Rs 86,667
Desired sales volume to earn existing profit = Rs 38,000/0.30 = Rs 1,26,667
Assuming that variable costs of SV Ltd decline by Re 1 per unit, revised BEP Rs 26.000/0.

Effect of Changes In Fixed Costs
A firm may be confronted with the situation of increasing fixed costs. An increase in the total budgeted fixed costs of a firm may be necessitated either by external factors such as an increase in property taxes, insurance rates, factory rent and so on, or by a managerial decision of an increase in salaries of executives. More important than this in the latter category are ex

Additional Sales Volume Required to Offset a Reduction In Selling Price
The sales manager on the basis of a market research/survey may report to the management that due to increased compunction in the market and the liberal import policy of the government, the present price is relatively higher. He may advise reduction in prices to stay in competition.
Suppose that SV Ltd reduces its selling price from Rs 10 a u

Break-Even Analysis Applications
Sales Volume Required to Produce Desired Operating Profit
One application of a BE analysis is to determine the required sales volume to generate a budgeted amount of profit. The required sales are given by Eq. 8.15.
(Fixed expenses + Desired operating profit) + P/V ratio
In Example, if the desired operating profit of SV Ltd is Rs 14,000, required sales volume (Rs 26,000 + Rs 14

Equation Technique
This is the most general form of analysis, which can be applied to any cost volume profit situation. It is based on an income equation: Sales revenue Total costs = Net profit Breaking up total costs into fixed and variable, Sales revenue Fixed costs Variable costs = Net profit or Sales revenue = Fixed costs + Variable costs + Net profit.
If S he the number of units required for break-even an

Margin of Safety
The excess of the actual sales revenue (ASR) over the break-even sales revenue (BESR) is known as the margin of safety. Symbolically, margin of safety = (ASR – BESR)
When the margin of safety (amount) is divided by the actual salt (amount), till margin of safety ratio is obtained. Symbolically,
The M/S ratio indicates the percentage by which the actual sales may be reduced before they belo

Contribution Margin Approach
The logic underlying the determination of the BEP under this approach can be stated by answering the following question:
How many ice-creams having a unit cost of Rs 2 and a selling price of Rs 3, must a vendor sell in a fair to recover the Rs 800 fees paid by him for all and additional of Rs 400 to install the stall? The answer can be determined by dividing the fixed cost by t

BREAK-EVEN ANALYSIS
A break-even analysis shows the relationship between the costs and profits with sales volume. The sales volume which equates total revenue with related costs and results in neither profit nor loss is lied the break-even volume or point (BEP). If all costs are assumed to be variable with sales volume, the BEP would be at zero sales. If all costs were fixed, profits would vary disproportionatel