Cost-Volume-Profit Analysis

CVP Assumptions
- Selling price is constant. The price of a product or service will not change as volume
changes.
- In a multiproduct firm, the sales mix is constant
- Costs are linear and can be accurately divided into variable (constant per unit) and fixed
(constant in total) elements
- Sales and production are equal; there is no material fluctuation in inventory levels.

Total Per unit

Fixed Constant Inversely  Output
Variable Directly  Output Constant

Contribution Income Statement

- Contribution Margin (Cm) is the amount remaining from sales revenue after variable
expenses have been deducted. CM is used first to cover fixed expenses. Any remaining
CM contributes to net operating income.
- Sales – (COGS, Gross Profit, OpEx, NI)

CVP Relationships – Equation

P = selling price per unit
Q = quantity sold
V = variable cost per unit

Contribution Margin Ratio

- The CM ratio is calculated by dividing total contribution margin by total sales
- Profit = (CM Ratio x Sales) – Total Fixed Cost

Break-even Point
- BEP is the level of sales at which the company’s profit is zero.
- Once the BEP has been reached, net operating income will increase by the amount of the
unit contribution margin for each additional unit sold.
 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 80000 200,000
𝐵𝐸𝑃 (𝑑𝑜𝑙𝑙𝑎𝑟 𝑠𝑎𝑙𝑒𝑠) = = = = 400 𝑢𝑛𝑖𝑡𝑠
𝐶𝑀 𝑅𝑎𝑡𝑖𝑜 40% 500

Target Profit Analysis (Unit Sales)

𝑇𝑎𝑟𝑔𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 20,000 + 80,000
= = 500 𝑢𝑛𝑖𝑡𝑠
𝐶𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 200

Margin of Safety
- This is the excess of budgeted or actual sales over te break-even volume of sales
Margin of Safety in Dollars = Total Sales – Break-even Sales