CVP Analysis

Meaning
●
CVP analysis shows the relationship
among the various ingrediants of profit
planning namely unit sale price,
variable cost , sales volume , sales mix
and fixed cost.
●
CVP analysis is a management
accounting tool to show the relationship
between these ingrediants of profit
planning.
 Break-Even Analysis
● A Break-even analysis is concerned with the study
of revenues and cost in relation to sales volume
and particularly the determination of that volume
of sales at which the firms revenues and total
costs will be exactly equal.
● BEP may be defined as a point at which the firm's
total revenues are exactly equal to total cost,
yielding zero income.
 Cash Break-Even Point
●
Cash Break-even point is total cash fixed
cost divided by contribution margin per
unit.
●
For this purpose fixed cost are divided
into cash fixed cost such as salaries,
rent etc and non- cash fixed cost such as
depreciation , deferred expenses etc.
 Important terms and concepts in CVP
analysis.
●
Fixed cost : It represents those expenses which
do not vary in total with the change in volume
of output for a given period of time.
●
Variable cost : It represents those expenses
which increase or decrease in proportion to the
output and sales.
●
Contribution : The excess of selling price over
and above the variable cost is known as
Contribution.
 P / V or Contribution ratio
●
Profit volume ratio ,Contribution ratio or
Marginal ratio reveals the rate of
contribution per product as a percentage
of turnover.
●
A high P/v ratio indicates high
profitability and low P/v ratio indicates
low profitability.
 Margin Of Safety
●
It is the amount by which the actual volume of sales
exceeds the break-even sales.
●
A high margin of safety indicates that the concern will
make profits even if there is a fall in production or
sales.
●
A low margin indicates that fixed costs are high and
profit cannot be made unless sales are increased to
absorb the fixed costs or the selling price is increased
or costs are reduced or a profitable product is made to
substitute an existing product.
 Applications of Marginal Costing
●
Pricing Decisions
●
Make or Buy decision
●
Problem of key factor
●
Selection of a suitable product / sales mix
●
Level of activity planning
●
Shut down decision
●
Discontinuance of a product line
●
 Formulae for CVP Analysis
●
Marginal cost = Variable costs
●
Contribution = Sales – Variable Cost
●
= Fixed Cost + Profit
●
P/v ratio = Contribution * 100
●
Sales
●
BEP ( units ) = Fixed Cost * 100
●
Contribution per unit
●
BEP ( Rs ) = Fixed Cost / Pv ratio
 Formulae
Margin of Safety ( units ) = Actual Sales – BEP

Margin of Safety ( Rs ) = Profit / Pv ratio

Desired sales ( units ) = Fixed cost + Desired Profit

Contribution per unit

Desired Sales ( Rs ) = Fixed cost + Desired Profit

P/v ratio