Cost-Volume-

Profit (CVP)
Analysis:

• Naveed Mehdi
• Manzoor Ali
• Muhammad Sohaib
• Mehdi Khan
 CVP analysis is a managerial accounting technique used to study the
relationships between a company's sales volume, costs, and profits. It
helps businesses understand how changes in sales volume affect their
profitability. The key components of CVP analysis are:
• Sales Revenue: The total amount of money generated from the sale
of products or services.
Cost-Volume- • Variable Costs: Costs that vary in direct proportion to the level of
sales or production.
Profit (CVP) • Fixed Costs: Costs that remain constant regardless of the level of
Analysis: sales or production.
• Contribution Margin: The difference between sales revenue and
variable costs.
• Profit: The amount of money remaining after deducting all costs
from sales revenue.
 The break-even point is the level of sales at which a company's total
revenue exactly equals its total costs, resulting in zero profit or loss.
It is the point where the company covers all its costs but does not
generate any profit.
 Formula: Break-Even Point (in units) = Fixed Costs / Contribution
Break-Even Margin per unit
Point  Example: Continuing from the previous example, the fixed costs
were $10,000, and the contribution margin per unit was $20 ($50 -
$30). The break-even point in units would be:
 Break-Even Point (in units) = $10,000 / $20 = 500 units
  When profit is earned more than break even that is called safety
margin.
 Formula: Safety Margin = Actual Sales - Break-Even Sales
 Example: Using the same company as before, if the actual sales are
Safety Margin 600 units and the break-even sales are 500 units, the safety margin
would be:
 Safety Margin = 600 units - 500 units = 100 units
 Operating leverage refers to the degree to which a company uses fixed costs in its
operations. It measures the sensitivity of a company's profit to changes in sales
volume. A high operating leverage means that a company has a significant portion
of fixed costs in its cost structure, making it more sensitive to changes in sales.

Operating `Formula: Operating Leverage = Contribution Margin / Operating Income

Leverage: Example: Suppose a company has a contribution margin of $20,000 and an

operating income of $10,000. The operating leverage would be:

Operating Leverage = $20,000 / $10,000 = 2

This indicates that for every 1% change in sales, the company's operating income
will change by 2%.
 Data
Product A B C
Units 5000 10000 15000
EXAMPLE Selling price 10 5 2
Variable cost 5 3 1
Total fixed cost 60000
1. Sales contribution: sales of product/ Total sales
38% 38% 24%
2. CM: Selling price – variable cost
5 2 1
3. CM * SC and sum :
1.9 + 0.76 + 0.24 = 2.9 WACM
Break even:
60000/2.9=20700 units , 127926 amount
Safety Margin
130000 – 127926= 2074
TThanks