Basic CVP summary

 Cost volume profit analysis is the study of the interrelationships between costs, volume and profit at
various levels of activity.
 Breakeven point is the activity at which there is neither profit nor loss.
 Breakeven point (units) = Total fixed cost / Contribution per unit.
 Contribution to sales ratio is a measure of how much contribution is earned from each $1 of sales.
 C/S ratio = Contribution per unit / Selling price per unit or C/S ratio = Total contribution / Sales
revenue.
 Breakeven point (rupees) = Breakeven point in units x Selling price or Breakeven point (rupees) =
Fixed cost / Contribution to sales ratio.
 Margin of safety is the difference between actual sales and breakeven sales.
 Margin of safety may also be expressed in percentages.
 Margin of safety (units) = Actual sales units – Break even sales units.
 Margin of safety (rupees) = Actual sales revenue – Breakeven sales revenue.
 Margin of safety (%) = Margin of safety (units) / Actual units or Margin of Safety (%) = Margin of
safety (rupees)/ Actual sales revenue.
 At breakeven point 1. Sales revenue = Total costs 2. Total contribution = Fixed costs.
 Target profit (units) = (Fixed cost + target profit) / Contribution per unit.
 Target profit (rupees) = Target profit (units) x Selling price per unit or Target profit (rupees) = (Fixed
cost + target profit) / Contribution to sales ratio.
 Breakeven point can also be determined graphically using a breakeven chart or a contribution
breakeven chart.
 Breakeven chart has the following axes: Horizontal axis shows sales/output (in value or units) and
Vertical axis shows $ for sales revenue and costs
 Breakeven chart shows 1. Sales revenue line 2. Fixed cost line 3. Total cost line.
 Breakeven point on the chart is the intersection of sales revenue and total cost line.
 Distance between breakeven point and actual sales indicates margin of safety.

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 Basic CVP summary

 Contribution (or contribution breakeven) chart is a diagram which is very similar to breakeven chart
the only difference is that there is a variable cost line instead of fixed cost line in it.


 Profit/volume chart is a variation of the breakeven chart which illustrates the relationship between
profit to sales.
 Profit/volume chart has following axis: Horizontal axis represents sales revenue and Vertical axis
represents profit/loss.
 It starts from y-intercept representing fixed cost amount at the level of production of zero. Its
gradient shows the contribution to sales ratio. The line moves upwards and cuts the x axis at
breakeven point.

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