The variable costs for counseling are $400 per patient per year. Fixed costs are $60000 in the relevant range of 50 – 150 patients. If the city spends the entire budget appropriation, how many patients can it serve in a year?
Nonprofit Application Use the breakeven equation to solve the problem. Let N be the number of patients , substitute the $100000 lump-sum budgets for sales. Variable + Fixed Sales = expenses + expenses $100,000 = $400N + $60,000 $400N = $100,000 – $60,000 N = $40,000 ÷ $400 N = 100 patients
Nonprofit Application If the city cuts the total budget appropriation by 10%, how many patients can it serve in a year? Budget after 10% Cut $100,000 X (1 - .1) = $90,000 Variable + Fixed Sales = expenses + expenses $90,000 = $400N + $60,000 $400N = $90,000 – $60,000 N = $30,000 ÷ $400 N = 75 patients
Additional Uses of CVP analysis Margin of Safety Margin of safety: It measures how far sales can fall before losses occur (a business reaches breakeven point) and is the difference between the level of planned sales and the break-even point. The margin of safety is the amount of sales a company can lose before it actually starts to lose money or stops making a profit.
Additional Uses of CVP analysis Margin of Safety An excess of a company's actual sales revenue over the breakeven sales revenue, expressed usually as a percentage. The greater this margin, the less sensitive the company to any abrupt fall in revenue. The margin of safety is also an important figure because it shows how safe the business is in producing products.
Additional Uses of CVP analysis Margin of Safety For example, assume a manufacturer calculates its breakeven to be 100 units. Based on its sales projections, the company anticipates selling 150 units during the next quarter. The margin of safety on this product is 50 units.
Additional Uses of CVP analysis Margin of Safety This means that the company could potentially lose 50 sales during the period without creating a loss from operations. If the company loses 60 sales during the period, it won't make its breakeven point and will actually lose money producing the product.
Additional Uses of CVP analysis Margin of Safety Margin of Safety in units = Planned unit sales – break even unit sales Margin of safety in dollars = Planned dollar sales – break even dollar sales The larger the margin of safety, the less likely it is that volume will fall to the point where the company has an operating loss, that is below the break even point. A smaller margin of safety indicates greater risk of incurring a loss.
Additional Uses of CVP analysis Margin of Safety Eg: If Amy Winston (Vending Machine) predicts sales volume of 80000 units or $120000, the margin of safety in units is 20000 and the margin of safety in dollars is $30000. Margin of safety in units: 80000units - 60000units=20000 Margin of safety in dollars: $120000 - $90000 = $30000
Additional Uses of CVP analysis Operating Leverage Cost Structure: The combination of variable and fixed cost resources used to carry out the organisation’s activities Operating Leverage: The sensitivity of a firms profit to changes in volume of sales.
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