Divide the total net sales by the total variable costs, then multiply the result by the quantity of units produced. To calculate the contribution margin per unit, multiply net sales by the total variable costs. Determine the selling price of the productĬalculate your company’s net sales, which are the proceeds from product sales less discounts, allowances, and returns. Total production costs = Fixed costs – (Variable cost per unit x Number of units produced) 2. The following formula can be used to determine the total fixed costs: The steps to take in order to calculate a cost-volume-profit analysis are as follows: 1. How to calculate a cost-volume-profit analysis Cost Volume Profit Analysis (CVP): calculating the Break Even Point This conveys to business decision-makers the effects of changes in selling price, costs, and volume on profits (in the short term). It should be remembered that number of units of a product should be selected in the mix which again depends on the demand for the same.Analysis, is a financial planning tool that leaders use when determining short-term strategies for their business. Then, the ranking will depend on the relative contribution per unit of key factor and, as such, selection of product will depend on it. (b) Needless to mention here that product preference will be selected on the basis of (a) (iii) stated above bearing in mind that maximum demand for each of the two products is 3,500 units, i.e., 3,500 units of more profitable product will be produced first and the balance of available materials will be utilised in order to produce less profitable product.Īnother key factor may also appear from demand side of the product. (b) Assuming raw materials as key factor, availability of which is 10,000 kg., and maximum sales potential of each product being 3,500 units, find out the product mix which will yield the maximum profit. (iv) Production capacity (in terms of machine hours) is the limiting factor. (ii) Total sales potential in values is limited (i) Total sales potential in units is limited Comment on profitability of each product (both use the same raw materials), when (a) The following particulars are extracted, from the records of a company:ĭirect Wages per hour is Rs. Then, Product B is most profitable, then Product A, and, at last, Product C. (ii) If the capacity of the machines is the key factor, contribution (per minute) of standard machine time should be taken into consideration. So, per unit A is most profitable, then product B, and, at last, Product C. (i) If raw material is the key factor, contribution per kg. It is noted that 3 kg, 4 kg, and 5 kg of raw materials are required to produce one unit of A, B and C, respectively. In the following year, the company faces extreme shortage of raw materials. Production is limited by machine capacity.įrom data given below, indicate priorities for products A, B and C with a view to maximise profits. All the three products are made from the same set of machines. At the same time, if there is any other key factor, contribution have to be expressed in terms of that factor and appropriate decision should be taken accordingly.Ī company manufactures and markets three products A, B, C. On the other hand, if there is no key factor about units of output of Product Y, the same is more profitable. Now, if output is key factor, Product X is naturally more profitable. viz., Product X, and Product Y, comment on the relative profitability:įrom the above profitability statement, it becomes crystal clear that total profit as well as contribution per unit is higher in case of Product X although profit per unit in case of Product Y is higher. From the following particulars of the two products of XY Ltd.
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