CVP Analysis

CVP Analysis
Compiled by:
Md. Mahedi Hasan FCA CPFA FFA FIPA
C-V-P analysis is an
important tool in terms
of short-term planning
and decision making
Uses of
Breakeven/CVP It looks at the
relationship between
Analysis costs, revenue, output
levels and profit
Short run decisions

where C-V-P is used
include choice of sales
mix, pricing policy etc.
How many units must be
sold to breakeven?
Decision
How many units must be
making and sold to achieve a target
Breakeven profit?
Analysis:
Examples Should a special order be
accepted?
How will profits be

affected if we introduce a
new product or service?
Key • Break even point-the point at which a
Terminology: company makes neither a profit or a
Breakeven loss.
Analysis
• Contribution per unit-the sales price
minus the variable cost per unit. It
measures the contribution made by
each item of output to the fixed costs
and profit of the organisation.
• Margin of safety-a measure in which the
budgeted volume of sales is compared with
the volume of sales required to break even
• Marginal Cost – cost of producing one

extra unit of output
Fixed Costs/ Contribution
per unit (In Unit)
*Contribution per unit = Selling Price
per unit – Variable Cost per unit
Breakeven Formula
Fixed Costs/Contribution
margin ratio (In Tk.)
* Contribution margin Ratio =
Contribution per unit/Sales per Unit
(in%)
The difference
between budgeted or
actual sales and the
breakeven point
Margin of The margin of safety

may be expressed in
Safety units or revenue
terms
Shows the amount by

which sales can drop
before a loss will be
incurred
Example 1
Using the following data, calculate the
breakeven point and margin of safety in units:
• Selling Price = Tk. 50
• Variable Cost = Tk. 40
• Fixed Cost = Tk. 70,000
• Budgeted Sales = 7,500 units
Example 1: Solution
• Contribution = Tk. 50 - Tk. 40 = Tk. 10 per unit
• Breakeven point = Tk. 70,000/Tk. 10 = 7,000
units
• Margin of safety = 7500 – 7000 = 500 units
• What if a firm doesn’t just want
to breakeven – it requires a
target profit
Target • Contribution per unit will need
to cover profit as well as fixed
Profits costs
• Required profit is treated as an
addition to Fixed Costs
Example 2
Using the following data, calculate the level of
sales required to generate a profit of Tk.
10,000:
• Selling Price = Tk. 35
• Variable Cost = Tk. 20
• Fixed Costs = Tk. 50,000
Example 2: Solution
• Contribution = Tk. 35 – Tk. 20 = Tk. 15
• Level of sales required to generate profit of Tk.
10,000:
Tk. 50,000 + Tk. 10,000
Tk. 15
= 4000 units
Costs are either fixed or variable
Fixed and variable costs are clearly

perceptible over the whole range of output
Production = Sales
Limitations
One product/constant sales mix
of B/E
analysis Selling price remains constant
Efficiency remains unchanged
Volume is the only factor affecting costs

Break-Even Analysis
The formulae used so far assumes that Unit Costs are
known ie Unit Selling Price and Unit Variable Cost
When no unit costs are known, the Profit/Volume Ratio

should be used instead
Profit Volume Ratio
P/V Ratio (Profit/Volume Ratio) =
Total Contribution / Sales x 100
If asked to calculate the volume of sales needed to

Break-Even (when no unit costs are given) the
following formula should be used:
Sales at BEP = Fixed Costs / Profit/Volume Ratio

Profit/Volume Ratio
For Example
Sales Tk. 60,000

Variable Costs Tk. 24,000
Fixed Costs Tk. 14,000
Calculate the P/V Ratio and the BEP

Answer
Sales – Variable Costs = Total Contribution
Tk. 60,000 - Tk. 24,000 = Tk. 36,000
Total Contribution / Sales = P/V Ratio

(Tk. 36,000 / Tk. 60,000) x 100 = 60%
Fixed Costs / P/V Ratio = Sales at BEP

Tk. 14,000 / 60% = Tk. 23,333
Therefore Tk. 23,333 of Sales are necessary in order

to Break-Even
LIMITING FACTORS
• Under normal circumstances, the best-paying product
is that which shows the highest contribution per Tk.
of sales
• Certain circumstances make this inappropriate eg
– a factory producing a particular range of products may

depend on a highly skilled labour force
– If skilled labour is in short supply in the locality of the

factory, then labour is termed a limiting, or key, factor
LIMITING FACTORS
• The most important criterion now will be the
optimum use of labour
• This is expressed by the contribution per labour hour
• Direct labour is only one example of a limiting factor
• Other examples could be
– direct materials
– machine hours
– factory capacity
For Example
• In a situation where labour is scarce (ie direct labour =
limiting factor), advise management which of Products
X and Y is more profitable
Product X Product Y
Selling Price Tk. 100 Tk. 100
Contribution %
(P/V Ratio) 35% 30%
Direct Labour
Hours per unit 25 hours 20 hours
Answer
Under normal circumstances Product X would be the
better paying product because of its higher P/V Ratio
However, when the limiting factor is labour, Product Y
becomes the better paying product:
Product X Product Y
35% x Tk. 100 30% x Tk. 100

Contribution Per Direct
Labour Hour
25 20
= Tk. 1.40 = Tk. 1.50
PRODUCT MIX
• A business may produce a number of products but at the same
time be unable to meet total demand for all products due to a
limiting factor eg machine hours or labour hours.
• In this case the business would decide on the optimum use of

the limited resource by producing all of the demand for the
product which yields the highest contribution per the limiting
factor.
• Having produced all of the demand from that product, the

business would produce the next highest contribution per the
limiting factor and so on until full capacity is reached.
For example
A business can produce Products A, B and C.
A B C
Contribution per labour Tk. 2 Tk. 1 Tk. 3
hour
Labour hours per unit 4 4 3
Total demand in units 5,000 5,000 10,000
The factory is limited to 60,000 labour hours.

How many units of each Product should be produced
to maximise profit?
Answer
Produce in the order of the highest Contribution per Labour
Hour ie C then A then B
C A
Demand 10,000 5,000
Labour hrs/unit 3 4
Total lab hrs 30,000 20,000
Total labour hours required to produce all demand for

C then A = 50,000 labour hours.
Answer
If Total Labour hours available equals 60,000 and 50,000
is used producing Products C and A, then 10,000
labour hours are left to produce as many units as
possible for Product B
Product B uses 4 labour hours per unit, therefore only
2,500 units of Product B can be produced within the
available 60,000 labour hours

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CVP Analysis

Short run decisions

How will profits be

• Marginal Cost – cost of producing one

Margin of The margin of safety

Shows the amount by

Fixed and variable costs are clearly

Efficiency remains unchanged

Volume is the only factor affecting costs

When no unit costs are known, the Profit/Volume Ratio

Total Contribution / Sales x 100

If asked to calculate the volume of sales needed to

Sales at BEP = Fixed Costs / Profit/Volume Ratio

Sales Tk. 60,000

Calculate the P/V Ratio and the BEP

Total Contribution / Sales = P/V Ratio

Fixed Costs / P/V Ratio = Sales at BEP

Therefore Tk. 23,333 of Sales are necessary in order

• Certain circumstances make this inappropriate eg

– a factory producing a particular range of products may

– If skilled labour is in short supply in the locality of the

35% x Tk. 100 30% x Tk. 100

• In this case the business would decide on the optimum use of

• Having produced all of the demand from that product, the

Total demand in units 5,000 5,000 10,000

The factory is limited to 60,000 labour hours.

Total lab hrs 30,000 20,000

Total labour hours required to produce all demand for

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