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  • 4 - CVP Analysis

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    Silent Killer
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    Cost-volume-profit (CVP) or break-even analysis determines the sales volume needed to cover total costs. It assumes costs are either fixed or variable and remain constant, revenues are predictable, and inventories do not change. The break-even point is where total revenues equal total costs, which is calculated by dividing fixed costs by the contribution margin per unit. CVP analysis provides terms like margin of sales, degree of operating leverage, contribution margin, and break-even points in units or sales.

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    Cost-volume-profit (CVP) or break-even analysis determines the sales volume needed to cover total costs. It assumes costs are either fixed or variable and remain constant, revenues are predictable, and inventories do not change. The break-even point is where total revenues equal total costs, which is calculated by dividing fixed costs by the contribution margin per unit. CVP analysis provides terms like margin of sales, degree of operating leverage, contribution margin, and break-even points in units or sales.

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    7 views1 page

    4 - CVP Analysis

    Uploaded by

    Silent Killer
    Cost-volume-profit (CVP) or break-even analysis determines the sales volume needed to cover total costs. It assumes costs are either fixed or variable and remain constant, revenues are predictable, and inventories do not change. The break-even point is where total revenues equal total costs, which is calculated by dividing fixed costs by the contribution margin per unit. CVP analysis provides terms like margin of sales, degree of operating leverage, contribution margin, and break-even points in units or sales.

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    COST-VOLUME-PROFIT (BREAK-EVEN) ANALYSIS

    Break-even Point = TR = TC = FC + VC

    Assumptions/Limitations:
     All costs are either variable or fixed.
     Total cost and total revenues are predictable and
    linear.
     Fixed cost remains constant.
     Unit variable cost remains constant.
     Unit selling price remains constant.
     Finished goods and work-in-process inventories
    do not change significantly. (P=S)
     Time value of money is ignored.

    CVP Terms
     Margin of Sales (MOS) and MOS Ratio
    MOS = Actual Sales – BE Sales
    MOS Ratio = MOS/Sales
     Degree of Operating Leverage (DOL) = CM/OI
     Contribution Margin = Sales – VC
     CM per unit (CMu) and CM Ratio (CMr)
    CMr = CM/Sales or CMu/SPu
     Breakeven in units (X) or sales
     Sales mix

    Breakeven in units Breakeven in sales


    TR = TC TR = TC
    Sales = VC + FC Sales = VC + FC
    SPu X = VCu X + FC Sales = FC / CMr
    SPu X – VCu X = FC
    X (SPu – VCu) = FC
    X = FC / CMu

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