Cost Volume Profit Analysis

Cost volume profit analysis examines the behavior of total

revenues, total costs, and operating income as changes
occur in the level of output, the selling price, the variable
cost per unit, and/or the fixed costs of a product.
Managers use CVP analysis to help answer questions such
as: How will total revenues and total costs be affected if
the output level changes- for example, if we sell 1,000
units more? If we expand our business into foreign
markets, how will that affect costs, selling price, and
output level?
 Assumptions
CVP analysis is based on several assumptions which are
as follows:
1. Changes in the levels of revenues and costs arise only
because of changes in the number of product(or
service) units and sold;
2. Total cost can be separated into fixed and variable;
3. When represented graphically the behaviors of total
revenues and total costs are linear;
4. Selling price, variable costs per unit and fixed costs are
known and constant;
5. Sales mix is assumed to be constant; and
6. All costs and revenues can be added and compared
without taking into account the time value of money.
 Terms
Breakeven point: The breakeven point(BEP) is that quantity of
output sold at which total revenues equal total costs- that is,
the quantity of output sold at which the operating income is
zero.
Contribution margin: The contribution margin per unit is the
difference between the selling price and the variable cost per
unit.
Contribution margin ratio: The contribution margins a
percentage of sales is referred to as the contribution margin
ratio (CM Ratio)
Contribution
CM Ratio= ------------------
Sales
Margin of Safety: Margin of safety is the difference between
budgeted sales(actual sales) and breakeven sales.
 Breakeven point calculation method
1. Equation Method
BEP in units = (SP X Q)- (VCU X Q) –FC = 0
BEP in Tk. = BEPU X Sales price per unit
2. Contribution margin method
FC
BEPU = -----------
CPU
Fixed Costs
BEP in Tk. ----------------
CM ratio
3. Graph method