Cost Volume Profit ( CVP) Analysis

Need of CVP Analysis

• Managers want to know how profits will change as the units sold of a product or
service changes.
• Managers like to use “what-if” analysis to examine the possible outcomes of
different decisions so they can make the best one.
Essentials of CVP Analysis
• Total costs consist of fixed costs and variable costs.
• Revenue and costs behave and can be graphed as a linear function (a straight line).
• Selling price, variable cost per unit and fixed costs are all known and constant.

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 Format of Income statement under CVP Analysis

Per unit Total ( per unit X number of units)

Revenue XX
Less: Variable Cost (XX)
Contribution Margin XX XXX
Less: Fixed Cost (XX)
Operating Profit XX

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 Important Concepts under CVP Analysis
• Break Even Point (BEP) = Point of No Profit No Loss

• BEP is the Point where Revenue = Variable Cost + Fixed Cost

• Margin of Safety (MOS) = Revenue – BEP Sales

• Profit to Volume( PV )Ratio = Contribution Margin = Contribution / Sales

• PV ratio will be constant at any level ( volume) of activity.

• PV ratio will change only with changing Selling price per unit and / or
Variable cost per unit.

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