Short Term Decision Making

Assumptions of CVP analysis

• fixed costs remain fixed

• variable costs change in proportion to volume

• unit prices do not change with volume

• efficiency and productivity do not change with volume

• volume is the only factor affecting cost

CVP

Analysis of changes of volume on contribution and profit

• how many units need to be sold to make profit

• how much will profit fall if the price is reduced by £1

• what will happen to the profit if we operate at a lower capacity

Contribution

Contribution = Selling price - Variable costs

Breakeven Point

Fixed Cost/Contribution per unit

Margin of Safety

Amount by which budgeted sales can fall before a business makes a loss

Margin of Safety Units

Budgeted sales units - Breakeven sales units

Margin of Safety %

MOS units/Budgeted sales units x 100%

Target Profit

Sales volume at which a particular profit is made

Total fixed costs + required profit/ Contribution per unit

PV Ratio

A measure of the rate at which profit is generated with sales volume

P/V ratio = Contribution/Selling price