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    Cost-Volume-Profit (CVP) Analysis

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    Asimsa
    Cost-volume-profit (CVP) analysis examines the impact of varying costs and sales volumes on operating profit. It determines the break-even point for different sales volumes and cost structures. The analysis makes assumptions like constant prices, fixed costs, and variable costs per unit. It uses equations involving these factors and plots them on an economic graph. CVP analysis can calculate the sales volume needed to break even and can determine the sales needed to achieve a target profit level. It provides useful information for short-term economic decision making.

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    Cost-Volume-Profit (CVP) Analysis

    Uploaded by

    Asimsa
    34 views3 pages
    Cost-volume-profit (CVP) analysis examines the impact of varying costs and sales volumes on operating profit. It determines the break-even point for different sales volumes and cost structures. The analysis makes assumptions like constant prices, fixed costs, and variable costs per unit. It uses equations involving these factors and plots them on an economic graph. CVP analysis can calculate the sales volume needed to break even and can determine the sales needed to achieve a target profit level. It provides useful information for short-term economic decision making.

    Original Description:

    Relevant Cost & CVP analysis

    Original Title

    CVP + Relevant Cost

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    Cost-volume-profit (CVP) analysis examines the impact of varying costs and sales volumes on operating profit. It determines the break-even point for different sales volumes and cost structures. The analysis makes assumptions like constant prices, fixed costs, and variable costs per unit. It uses equations involving these factors and plots them on an economic graph. CVP analysis can calculate the sales volume needed to break even and can determine the sales needed to achieve a target profit level. It provides useful information for short-term economic decision making.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    34 views3 pages

    Cost-Volume-Profit (CVP) Analysis

    Uploaded by

    Asimsa
    Cost-volume-profit (CVP) analysis examines the impact of varying costs and sales volumes on operating profit. It determines the break-even point for different sales volumes and cost structures. The analysis makes assumptions like constant prices, fixed costs, and variable costs per unit. It uses equations involving these factors and plots them on an economic graph. CVP analysis can calculate the sales volume needed to break even and can determine the sales needed to achieve a target profit level. It provides useful information for short-term economic decision making.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
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    Cost-Volume-Profit (CVP) Analysis

    Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that varying levels of costs and volume have on
    operating profit. The cost-volume-profit analysis, also commonly known as break-even analysis, looks to determine the break-even point
    for different sales volumes and cost structures, which can be useful for managers making short-term economic decisions.

    The cost-volume-profit analysis makes several assumptions, including that the sales price, fixed costs, and variable cost per unit are
    constant. Running this analysis involves using several equations for price, cost and other variables, then plotting them out on an economic
    graph.

    Cost-Volume-Profit Analysis Formula


    The CVP formula can be used to calculate the sales volume needed to cover costs and break even, in the CVP breakeven sales volume
    formula, as follows:
    Breakeven Sales Volume = Fixed Cost (FC) / Contribution Margin (CM)

    where: Contribution Margin (CM) = Sales − Variable Costs (VC)

    To use the above formula to find a company's target sales volume, simply add a target profit amount per unit to the fixed-cost component
    of the formula. This allows you to solve for the target volume based on the assumptions used in the model.

    What Does Cost-Volume-Profit Analysis Tell You?


    The contribution margin is used in the determination of the break-even point of sales. By dividing the total fixed costs by the contribution
    margin ratio, the break-even point of sales in terms of total dollars may be calculated. For example, a company with $100,000 of fixed
    costs and a contribution margin of 40% must earn revenue of $250,000 to break even.

    Profit may be added to the fixed costs to perform CVP analysis on a desired outcome. For example, if the previous company desired an
    accounting profit of $50,000, the total sales revenue is found by dividing $150,000 (the sum of fixed costs and desired profit) by the
    contribution margin of 40%. This example yields a required sales revenue of $375,000.

    CVP analysis is only reliable if costs are fixed within a specified production level. All units produced are assumed to be sold, and all fixed
    costs must be stable in a CVP analysis. Another assumption is all changes in expenses occur because of changes in activity level. Semi-
    variable expenses must be split between expense classifications using the high-low method, scatter plot or statistical regression.

    KEY TAKEAWAYS
     Cost-volume-price analysis is a way to find out how changes in variable and fixed costs affect a firm's profit.
     Companies can use the formula result to see how many units they need to sell to break even (cover all costs) or reach a certain
    minimum profit margin.

    Contribution Margin and Contribution Margin Ratio


    CVP analysis also manages product contribution margin. Contribution margin is the difference between total sales and total variable costs.
    For a business to be profitable, the contribution margin must exceed total fixed costs. The contribution margin may also be calculated per
    unit. The unit contribution margin is simply the remainder after the unit variable cost is subtracted from the unit sales price. The
    contribution margin ratio is determined by dividing the contribution margin by total sales.

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