Cost-Volume-Profit Analysis
CVP Scenario
Selling price (trip )
Variable cost (fuel)
CONTRIBUTION (S.P-V.C)
Monthly fixed expenses:
Rent
Driver’s Salary
Car Maintenance
Total fixed expenses per month
Per Unit
£250
200
£ 50
Percentage of Sales
100%
80
20%
£2,500
3,500
1,000
£ 6,500
Cost-volume-profit (CVP) analysis is the study of the effects of
output volume on revenue (sales), expenses (costs), and net
income (net profit).
Break-Even Point
The break-even point is the level of sales at which
revenue equals expenses and net income is
zero.
Sales
- Variable expenses
- Fixed expenses
Zero net income (break-even point)
CVP analysis: non-graphical computations
1. Fixed costs per annum
Unit selling price
Unit variable cost
Relevant range
£60 000
£20
£10
4 000 - 12 000 units
2. Profit volume (P/V) ratio = Contribution
Sales revenue
x 100
3. Break-even point (in units) = Fixed costs
Contribution per unit
= (20-10)/20 x 100 = 50%
= 60,000/10 = 6000 units
4. Break-even point (in sales value i.e. £ or £ ) = Fixed costs
P/V ratio
OR
= BEP in units x S.P p.u
= 60,000/50% = £ 120,000
= 6000 * 20 = £ 120,000
4. If unit fixed costs and revenues are not given, the break-even point (expressed in sales
values) can be calculated as follows:
Total fixed costs
Total contribution
x
Total sales
5. Units to be sold to obtain a desired profit (£30,000 profit):
Fixed costs + desired profit
=( 60,000+ 30,000) /£10 = 9000 units
Contribution per unit
6. Sales to obtain a desired profit (£30 000 profit):
Fixed costs + desired profit
=( 60,000+ 30,000) 50%= £180,000
P/V ratio
CVP analysis assumptions
1. All other variables remain constant e.g. sales mix, production
efficiency, price levels, production methods.
2. Complexity-related fixed costs do not change. If the range of
items produced increases but volume remains unchanged,
then it is assumed fixed costs will not alter.
3. Profits are calculated on a variable costing basis.
4. Unit variable cost and selling price are constant per unit of
output.
5. The analysis applies over the relevant range only.
6. Costs can be accurately divided into their fixed and variable
elements.
7. Single product or constant sales mix.
Margin of Safety
How much can
sales drop
before we
incur a loss?
Margin of safety =
Expected Sales – Break even sales
Percentage margin of safety =
Expected sales - Break-even sales
Expected sales
Operating profit = p/v ratio x(Exp. Sales-Breakeven sales)
Cost-Volume-Profit Graph