# Ø  Decision analysis:

It includes,

## Ø  Cost volume profit analysis: [ CVP]

It is known as break-even analysis

It is used mainly for short-run decision-making.

CVP analysis examines the relationships among revenue, cost, and profit.

### Ø  Contribution margin income statement:

sales revenue

– variable cost

= contribution margin

-Fixed cost

= operating income.

### 1.      Fixed cost:

Total fixed costs are fixed that means do not change.

Example: rent, salary, etc.

When production increase, total fixed cost do not change and fixed cost per unit decreases.

When production decreases total fixed costs do not change and fixed cost per unit increases.

### 2.      Variable cost:

It changes in total in response to fluctuation in the level of activity either production or sale.

Example:

Direct material, direct labor, variable manufacturing overhead, etc.

When production increases, total variable cost increases, and variable cost per unit is constant.

When production decreases, total variable cost decreases, and variable cost per unit remains constant.

### Ø  Mixed cost:

It contains both variable and fixed cost components.

Mixed cost= semi-variable cost+ semi-fixed cost.

### 1.      Semi-variable cost:

These are fixed up to a relevant range, after that it will increase as production increases.

Example: electricity bill, auto charge, water bill, etc.

### 2.      Semi-fixed cost:

It is also called step cost.

These are fixed up to a small relevant range, above that level, it will suddenly jump to the next level.

And remain fixed over a small relevant range and so on.

Example: nurse's salary

1-10 patients = 10k

10-20 patient= 20k

20-30 patients = 30k

### Ø  Contribution margin:

= sales- variable cost

[Contribution margin = selling price/ unit – variable cost/ unit]

[Total contribution margin = unit contribution margin × number of units sold]

### Ø  Contribution margin ratio:

CMR= total contribution margin ÷ total sale

Or

Contribution margin per unit ÷ selling price per unit

### Ø  Variable cost ratio:

= total variable cost ÷ total sale

Or

Variable cost/unit ÷ selling price /unit

### Ø  Break-even analysis:

It is a point at which no profit no loss.

Ø  Break-even volume:[ break-even unit]

It is a unit at which no profit no loss.

BEP volume [ unit] = total fixed cost ÷ contribution margin/ unit

### Ø  Break-even points in revenue:

BEPR= selling price/ unit × BEP unit

Or

BEPR= selling price per unit × break-even volume

BER = selling price / unit × break-even volume/unit

BEP unit = break even revenue ÷ selling price/ unit

BEP revenue = total fixed cost ÷contribution margin revenue

BEP unit = total fixed cost ÷ contribution margin per unit

BEP sale = TFC ÷ CMR

Or

BEP sale = selling/ unit × BEP unit

BEP unit = BEP sale ÷ SP / unit

### Ø  Assumption of CVP analysis:

All costs are an either variable or fixed costs

and there is no fixed cost.

Variable cost per unit remains constant.

Total fixed costs remain constant within the relevant range.

The graph of total cost and total revenue is the lender.

The selling price and sales mix remain constant.

The time value of money is ignored.

### Ø  Profit requirement:

Profit requirement may be before-tax profit amount or after-tax profit amount.

This requirement profit level may be expressed either as a monetary amount.

Eg; \$200000

Or as a percentage of total sales.

Eg: 15%

It helps to determine how many units must be sold or how much revenue is needed to reach a specific amount of profit.

Ø  Target monitory pre-tax profit requirement:

Target volume unit= fixed cost + target pre-tax profit  ÷ contribution margin/unit

Target revenue = fixed cost + target pre-tax profit ÷ contribution margin ratio

### Ø  Target pre-tax profit as a percentage of sales revenue:

Target pre-tax profit per unit = selling price × pre-tax profit percentage

Target volume: fixed cost ÷ adjusted contribution margin /unit

Adjusted CM /unit = CM /unit – pre-tax profit/unit

Target revenue = FC ÷ adjusted CMR

to be continued in the next post...

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