1. Introduction:
CVP Analysis:
Cost-volume-profit (CVP) analysis is used to determine how changes in costs and
volume affect a company's operating income and net income. In performing this
analysis, there are several assumptions made, including:
• Sales price per unit is constant.
• Variable costs per unit are constant.
• Total fixed costs are constant.
• Everything produced is sold.
• Costs are only affected because activity changes.
• If a company sells more than one product, they are sold in the same mix.
Managers need to estimate future revenues, costs, and profits to help them plan
and monitor operations. They use cost-volume-profit (CVP) analysis to identify the
levels of operating activity needed to avoid losses, achieve targeted profits, plan
future operations, and monitor organizational performance. Managers also analyze
operational risk as they choose an appropriate cost structure.
CVP analysis requires that all the company's costs, including manufacturing, selling,
and administrative costs, be identified as variable or fixed.
Contribution margin and contribution margin ratio
The contribution margin represents the amount of income or profit the company
made before deducting its fixed costs. Said another way, it is the amount of sales
dollars available to cover (or contribute to) fixed costs. When calculated as a ratio,
it is the percent of sales dollars available to cover fixed costs. Once fixed costs are
covered, the next dollar of sales results in the company having income.
1
2. The contribution margin is sales revenue minus all variable costs. It may be
calculated using dollars or on a per unit basis.
Break-even point
The break-even point represents the level of sales where net income equals zero.
In other words, the point where sales revenue equals total variable costs plus total
fixed costs, and contribution margin equals fixed costs.
Targeted income
CVP analysis is also used when a company is trying to determine what level of sales
is necessary to reach a specific level of income, also called targeted income. To
calculate the required sales level, the targeted income is added to fixed costs, and
the total is divided by the contribution margin ratio to determine required sales
dollars, or the total is divided by contribution margin per unit to determine the
required sales level in units.
CVP-Graph:
2
3. Objective of Study:
Primary objective:
• To fulfill the course requirement.
• To acquire knowledge.
Secondary Objective:
• To get an idea about the road side business.
• To get an idea about the financial performance of the business.
• Analysis and evaluate the cost volume profit analysis of that business.
Methodology:
To prepare this report, we used primary data. We have collected all those data
from the proprietor of the business.
Limitation:
Limitation is a usual part of report analysis. Whenever any report is going on to
analyze, there are several lacking to find out the result of the particular topic. To
make this report, we also faced some problems. Time constrains was another
problem. But while preparing the report we came to learn lots of practical things
and have gathered practical knowledge and finally we have enjoyed a lot to
prepare the whole paper work.
3
4. Company Profile:
Shahbuddin Tea Stall is a renowned tea stall located in Munsurabad R/A, Adabor,
Shamoli, Dhaka. Its owner name is Shahbuddin. He is only man who makes tea &
served another thing. It has two benches & one chair. There is one big box for
protect the fire of stove from the air. His stall is decorated with one stove, Two
Aluminum tea pot, 12 cups, two or three spoon & a pot for making tea. Some
sweet, cake, bread are displayed by hanging them in packet on his stall. The stall
has one water purifying machine for serving pure water. He everyday sell about 250
cup tea, 50 sweet, 60 paces of cake.
List of product: Per day Price
Tea dust 0.4kg 114/-
Sugar 1.5kg 90/-
Milk 5 Tin 240/-
Oil 1.5 liter 100/-
Water bottle 2 bottle 80/-
Cake 52 pieces 200/-
Banana 100 pieces 300/-
Sweet 35 pieces 80/-
Biscuit 50 pieces 70/-
Other Cost
Glass 180/-
Stove and etc 1,800/-
Box 600/-
Chair & Bench 1,150/-
Water purifying machine 7,400/-
Tea pot 600/-
Electricity 200/-
Light 200/-
Rent 1,500/-
Variable cost (For one month):
4
5. Product: Purchasing cost
Tea dust 3,400/-
Sugar 2,700/-
Milk 7,200/-
Oil 3,000/-
Water bottle 2,400/-
Cake 6,000/-
Banana 9,000/-
Sweets 1,650/-
Biscuit 2,100/-
Total 37,450/-
Fixed cost:
Product: Cost
Glass 180/-
Stove Burner 1,800/-
Box 600/-
Chair & Bench 1,150/-
Water Purifier Machine 7,400/-
Electricity Bill Expense 200/-
Tea Pot 600/-
Electric Bulb 200/-
Rent Expense 2,000/-
Total 14,130/-
Unit of Production:
Item Per day Month Unit Price Selling Price
Tea 200cup 6,000 cups 5.0/cup 30,000
Cake 52 pieces 1,560 pieces 5.00/piece 7,800
Banana 100 pieces 3,000 pieces 5.00/piece 15,000
Sweets 35 pieces 1,050 pieces 3.00/sweet 3,150
Water bottle 2 bottle 60 bottle 55.00/jar 3,300
5
7. Analysis:
Helal Tea stall produced has a single product & sell 5 product. This information are
taken from the original data those are flowing:
Sell: 6,000 cup tea, 1,560 pieces cake, 3000 pieces banana, 1,050 pieces sweets,
60 water bottle & 1500 pieces Biscuit =13,170 units
Selling price per unit (63,750/13,170) = 4.8405/- per unit
Variable cost per unit (37450/13170) = 2.8435/- per unit
Fixed Cost 14130 Taka
Contribution Margin (4.8405-2.8435) = 1.9969/- per unit
We separated the variable and fixed expenses from original data:
Sales (13,170*4.8405) Tk.63,750
Less: Variable cost (13,170*2.8435) Tk.37,450
Contribution (13,170*1.9969) Tk.26,300
Less: Fixed cost Tk.14,130
Net operating income Tk.12,170
Contribution margin ratio(C/M ratio):
To compute change in contribution margin and net operating income resulting from
change in sales volume:
C/M ratio = Contribution per unit /Sales per unit
=1.9969/5
=39.9938%
Here c/m ratio 39.9938% means that for each volume increase in sales.
7
8. BEP sales in units:
Break even sales as the level of sales at which the company’s profit is zero.
BEP sales in units = Fixed cost/Contribution per unit
=14,130 / 1.9969
= 7,076 units
BEP sales in volume = 7,076 units*4.8404
= Tk. 32,250.6704
Degree of operating leverage:
The degree of operating leverage is a measure at a given level of sales of how a
percentage change in sales volume will be affect profits.
Degree of operating leverage = Contribution Margin / Net operating Income
=26,300 / 12,170
=2.16105 times
Here, degree of operating leverage is 2.16105 the tea Stall net operating Income
grows 2.5386 times as fast its sales.
Assume set the farm target profit is Tk.20, 000.How many units would have to
be sold?
Target sales in units: (Fixed cost + Target profit)/ Contribution per unit
= (14,130 + 15,000) / 1.9969
=14,588 units
8
9. Conclusion:
Cost volume profit (CVP) measure how volume is the company product volume unit.
If the company produces less than BEP the company must be loss and the company
produce more than the company must be earn profit. As because CVP analysis helps
managers understand the interrelationships among cost, volume, and profit it is a
vital tool for taking business decisions. In this report analysis we have found that
Mr. Shahbuddin take the decision about the profitably condition of his business,
that if he wants to make a profit of Tk. 20000.00, he have to sell a amount of
14588 unit of product which is larger than his existing sells unit that is 13170 units.
In this report we tried to find out the cost and profit
In conclusion, we would like to say that, it was a great experience to do this
report. We actually got to know a lot of things. The things we study at classroom
are not only bookish things rather they are being implemented in real world. We
tried to cover all ratio of analysis the financial statement. But let that not be any
excuse rather we take all the blame on my shoulder regarding any flaw of this
report.
9
