Accounting for Managers: Interpreting accounting information for decision-making

MARKETING DECISIONS 107

In mathematical terms, this is:

N=Pu−(F+Bu)

where:

N=net profit

u=number of units sold

P=selling price per unit

F=total fixed costs

B=variable cost per unit

Using the example of XYZ Limited, a selling price of £25 for 20,000 units would
yield a net profit of:

N=(£25× 20 , 000 )−[£200, 000 +(£10× 20 , 000 )]

N=£500, 000 −£400, 000

N=£100, 000

CVP permits sensitivity analysis.Sensitivity analysisis an approach to under-
standing how changes in one variable (e.g. price) affect other variables (e.g.
volume). This is important, because revenues and costs cannot be predicted with
certainty and there is always a range of possible outcomes, i.e. different mixes of
price, volume and cost.
Using sensitivity analysis, a business may ask questions such as: What is the
selling price (P) required for a profit (N) of £150,000 on sales of 25,000 units? To
calculate this, we enter the data we know in the formula and solve for the missing
figure (in this case price):

£150, 000 =£P× 25 , 000 −[£200, 000 +(£10× 25 , 000 )]

£150, 000 =£25,000P−£450, 000

P=

£600, 000

25 , 000

P=£24 per unit

Thebreakeven pointis the point at which total costs equal total revenue, that is
where there is neither a profit nor a loss. How many units have to be sold for the
business to break even? This question can be answered by using simple algebra