Cost Volume Profit (CVP) Analysis

It is a method to determine the relationship between change in activity level, total sales revenue, expenses and profit. OR a method that  deals with how profits and costs change with a change in volume.

Objective of CVP analysis:

Establish the financial results when specified level of activity or volume changes. To establish this management need to know

Break-even point
Margin of safety
Break-even point: The level of activity where there is no profit or loss i:e the point at which cost or expenses and revenue are equal.

It can be calculated in units or in value, and can be calculated as follows:

Break-even point (in units) = Fixed cost ÷ Contribution per unit

Contribution per unit = Selling price per unit – Variable cost per unit

Break-even point (in value) = Fixed cost ÷ Contribution to sales ratio

Contribution to sales ratio = Total contribution ÷ Total Sales revenue

Margin of  Safety: It is the difference between budgeted sales volume/revenue and break-even sales volume/revenue. It shows the amount by which actual sales can fall without a loss being incurred.

It can be calculated also in units or in value, and can be calculated as follows:

Margin of safety (in value/units) = Budgeted Sales revenue/unit – Break-even Sales revenue/unit

Margin of Safety (in % value) = Budgeted Sales revenue – Break-even Sales revenue × 100% ÷ Budgeted Sales revenue

Margin of Safety (in % units) = Budgeted Sales units – Break-even Sales units × 100% ÷ Budgeted Sales units