See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/362889977

A case study on Cost-Volume-Profit Analysis

Article · February 2021

CITATIONS READS
0 3,523

2 authors:

Sasmita Mishra Monika Mishra

C. V. Raman Global University C. V. Raman College of Engineering
4 PUBLICATIONS 11 CITATIONS 9 PUBLICATIONS 1 CITATION

SEE PROFILE SEE PROFILE

All content following this page was uploaded by Monika Mishra on 24 August 2022.

The user has requested enhancement of the downloaded file.

 SAMAGRA GYAN JOURNAL
An International multidisciplinary Journal
(A Peer-Reviewed-referred Journal)
E-ISSN 2582–726X
Vol. 07, Issue 7, February 2021
A case study on Cost-Volume-Profit Analysis
Dr. Sasmita Mishra Monika Mishra,
Associate Professor Ph.D. Research Scholar
C.V. Raman Global University, Bhubaneswar C.V. Raman Global University, Bhubaneswar
Email Id: [email protected] Email Id: [email protected]

The paper shows a multi-disciplinary Case-Method approach to teaching Cost-

Volume-Profit (CVP) Analysis allowing students to use their own assumptions to
simulate a real-life business start up analysis. The proposed business venture is one
of starting a surgical mask making unit in the Puri district of Odisha. The purpose
of this case study is to familiarize the students with how CVP analysis can be used
to inform business decisions. This case can be used to provide real world context to
the academic study of CVP analysis and to differentiate between fixed and variable
costs, by applying some of their own assumptions, and determine whether it would
be profitable to open up a new business.
Keywords: Cost Volume Profit (CVP) Analysis, Break -even point (BEP)

Introduction
This paper is an alternative and more extensive teaching approach for Cost-Volume-Profit (CVP)
analysis from the commonly used approach which simply teaches students how to use a series of
equations to solve various questions related to CVP analysis, in which unit selling price, total fixed
costs, and unit variable costs are assumed to remain constant (Garrison et al. 2010; Choo and Tan,
2010). A multi-disciplinary approach in the context of a realistic case-analysis is been used. As per
my belief this approach provides useful insights and will give a useful learning tool for students
pursuing an advanced Master’s Degree. The case at hand requires students to: (a) make
assumptions about costs in a dynamic and interactive way, and (b) research a variety of marketing
issues for the proposed business that simulates a real life business situation. This paper’s approach
also helps students see the interrelationships between several concepts learned in basic graduate
courses taken in their Master Degree program, and how CVP analysis can be an extremely useful
tool for determining the potential success of a business they might consider opening one day.

125 | w w w . s a m a g r a g y a n . c o m
Particular attention is given to important concepts such as break-even analysis and the effect of
changing working assumptions on final results.
Development of the case
The case assumes students will open a surgical mask making unit on the Puri district of Odisha. We
have gone through the existing surgical mask making unit, read industry reports, and have done
some research on expected minimum costs to be incurred in operating the business. A surgical mask
also known as procedure mask, medical mask or simply as a face mask, is meant to be worn by
health professionals during surgery and through nursing to catch the bacteria shed in liquid droplets
and aerosols from the wearer’s mouth and nose. Surgical masks are disposable devices that cowl the
mouth and nose throughout medical procedures. They prevent the spread of infection between sick
and well persons. The face mask making business has a great scope of expansion as compared to a
home-based business and offers great returns. With the surge in pollution levels and virus-prone
lifestyles, wearing masks while stepping out has become mandatory. Starting a mask making
business the right way will help you thrive in the long run.
Cost of materials needed to make surgical mask
Direct material ingredients-
Ingredients price
Non-woven fabric Rs. 140/kg
Elastic face mask rubber Rs.399/kg

Fixed costs-
Particular Price
Rent Rs 1000 per month
Mask making Machinery (capacity to Rs. 1,15,000
produce 20-30 per min)
Machinery (packing)- Rs. 15,000

Cleaning Rs 100 per month

Packing materials Rs. 200 per month
Advertisement Rs. 1800 per year
Water Rs. 300 per month
Insurance Rs. 6000 per annum

126 | w w w . s a m a g r a g y a n . c o m
Employee-
One skilled part-time worker with a salary of Rs. 3,000 per month.
Requirement of the case
In order to answer the questions below, you will need to make assumptions, and add/change fixed
and variable costs (please clearly indicate all assumptions made).
1. Using the above information, determine the number of surgical mask you will need to sell to
archive the break-even. In order to do this, you will need to set a sales price as well as classify
the costs into fixed or variable. (Hint: keep all costs on either a weekly, monthly or yearly basis
throughout your analysis).
2. Now build-in a salary for yourself, and determine the amount of surgical mask you will need to
sell to break even.
Answer to the case
1. Monthly fixed cost:-
Particular Price
Salary of 1 skilled labour Rs. 3,000
Rent Rs.1000
Depreciation of mask making machine Rs. 1917 (Rs.1,15,000/60 months)
Depreciation of packing machine Rs. 417 (Rs.15,000/36)
Cleaning Rs. 100
Packing materials Rs. 200
Water Rs.300
Advertisement Rs.150
Annual insurance Rs.500 (Rs.6000 /12)
Total monthly fixed cost Rs.7584
By assuming the number of mask produced per month is 6000 units.
Fixed cost per unit= 7584/6000= Rs. 1.26
Variable cost per unit:

Particular Total cost Per unit cost

Non-woven fabric Rs. 140 for 333 pc. Rs. 0.42
Elastic face mask rubber Rs. 399 for 800 pc. Rs. 0.49
Power Rs. 2000 (2000/6000) Rs. 0.33

127 | w w w . s a m a g r a g y a n . c o m
Repair and maintenance Rs. 1000 (1000/6000) Rs. 0.16
Transportation Rs. 3000 (3000/6000) Rs. 0.50
Per unit total variable cost Rs. 1.90

Total cost= fixed cost + variable cost = Rs.1.26 + Rs.1.90 = Rs. 3.16
Here we are assuming that our sales price per unit will be Rs.4 and we are taking no salary.
Particular Per unit price
Sales Rs. 4
Less variable cost Rs. 1.90
Contribution Rs. 2.10
Less fixed cost Rs. 1.26
Profit Rs. 0.84

Break-even point= fixed cost /contribution per unit= 7584 /2.10 =3,612 units
To attend the break even 3,612 units need to be sold.
2. If we are taking salary of Rs. 9,000 per month.
Monthly fixed cost:-
Particular Price
Salary of 1 skilled labour and Rs. 12,000 (Rs.3000+Rs. 9000)
managers(owners)
Rent Rs.1000
Depreciation of mask making machine Rs. 1917 (Rs.1,15,000/60 months)
Depreciation of packing machine Rs. 417 (Rs.15,000/36)
Cleaning Rs. 100
Packing materials Rs. 200
Water Rs.300
Advertisement Rs.150
Annual insurance Rs.500 (Rs.6000 /12)
Total monthly fixed cost Rs.16,584
Total monthly fixed cost= Rs.16,584
Number of mask produced per month= 6000 units
Fixed cost per unit= 16,584/6000= Rs. 2.76

128 | w w w . s a m a g r a g y a n . c o m
View publication stats

Particular Per unit price

Sales Rs. 4
Less variable cost Rs. 1.90
Contribution Rs. 2.10
Less fixed cost Rs. 2.76
Loss Rs. 0.66
Break-even point= fixed cost /contribution per unit= 16,584 /1.90 = 8,729 units
If we are taking a salary of Rs.9000 per month then we need to sell 8,729 units so as to archive the
break even.

Conclusion
We believe that this case adds the students understanding towards CVP analysis in a clear manner
as it is beyond the traditional concept of teaching. This case will help the master degree students to
make assumptions about start up and to see the impact of their assumptions on break even points.

References
1. Brewer, P., Garrison, R., & Noreen, E. (2016). Introduction to Managerial Accounting (7th
ed.). New York, NY: McGraw Hill.
2. Susan Machuga.(2012). A Case Method Approach to Teaching Cost-Volume-Profit
Analysis. Journal of Accounting and Finance vol. 12(5).
3. George R. Wilson. Air Land Transport, Inc.: Using CVP analysis when considering
expansion into new markets. Journal of Business Cases and Applications Vol.23.
4. Choo, F. & Tan K.B. (2011). An Income Statement Approach for Cost-Volume-Profit
(CVP) Analysis by Using a Company’s CVP Model. Journal of Accounting and Finance,
11(4), 23-36.
5. https://www.indiamart.com/proddetail/surgical-mask-making-machine-10506350362.htm
6. https://www.thomasnet.com/articles/other/how-surgical-masks-are-made/
7. https://www.testextextile.com/fighting-the-coronavirus-top-6-knowledge-to-know-before-
investing-in-establishing-disposable-medical-mask-production-lines/
8. https://dir.indiamart.com/impcat/mask-raw-material.htm
9. https://www.who.int/emergencies/diseases/novel-coronavirus-2019/question-and-answers-
hub/q-a-detail/coronavirus-disease-covid-19-masks

129 | w w w . s a m a g r a g y a n . c o m