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BROWN BAG SESSION ON COST VOLUME PROFIT ANALYSIS

Article/News by: : Angelina T. Agayon
Date Posted: December 1, 2017



Around 23 business students joined the workshop entitled “Cost Volume Profit Analysis” organized by the Dean of College of Business Administration, Mr. Arnel L. Cadeliña MBA, RREA, Last November 23, 2017 At SHC Audio Visual Room 1 (AVR 1).

The workshop started by an opening prayer led by one of the 4th year student, followed by Mr. Cadeliña’s objective why he conducts the said workshop. Mr. Cadeliña stated that “this is a skill that a finance major or any business major should possessed.” Additionally, Mr. Cadeliña said that the purpose of CVP workshop is to combine the three (3) method, analyzed it, used it, so that you can implement it when you are at your workplace.

Mr. Cadeliña said that CVP analysis looks primarily at the effects of differing levels of activity on the financial results of a business. And he asked the student questions like “will the company make a profit in that year? And students answered that they don’t know, because they don’t know the sales volume for the year. And Dean Arnel said that they can work out how many sales the business needs to achieve in order to make a profit and this is where Cost Volume Profit begins.

He gives 3 methods for calculating the breakeven point, where he says that breakeven point is the point where profit is zero. 1st method, the equation method, a little bit of simple maths can help us answer numerous different cost volume profit questions and give the formula (selling price x quantity sold) – (variable cost x quantity sold) – fixed cost equals operating income. 2nd method, contribution margin method, this second approach were a little bit of algebra. The contribution margin is equal to total revenue less total variable cost or selling price less variable cost equals to contribution margin. 3rd method, the GRAPHICAL METHOD, with the graphical method, the total cost and total revenue lines are plotted on a graph; Price is shown on the Y axis and units are shown on the X axis. The point where the total cost and revenue lines intersect is the breakeven point.

Mr. Arnel Cadeliña also discussed the sales volume required to achieve a target profit. Given the formula of Number of Units equals Fixed Cost plus Target Operating Income over contribution margin per unit or contribution margin per unit. Using this formula, the management will be able to know the operating income they want to achieve. Revenues minus Variable Cost minus fixed cost equals target net income over (1- Tax rate), it is the formula needed by the company to know how many units they must be sold to get their target net income.

In any business, or, indeed, in life in general, hindsight is a beautiful thing. If only we could look into a crystal ball and find out exactly how many customers were going to buy our product, we would be able to make perfect business decisions and maximize profit.



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