Cost - Volume

Profit
(CVP) Analysis
Prof. (Dr.) Gourav Vallabh
XLRI Jamshedpur

CVP Analysis
It is a technique that may be used by
management accountant to evaluate how cost and
profits are affected by changes in the volume of
business activities.
It is also referred as What if analysis i.e. What
if there is a Change in selling price, or sales
volume, or sales mix, or fixed cost etc?
The CVP analysis focuses attention on short run
effect only because in the short run the level of
output is restricted to that available from the
current operating capacity.
As in the short run most of the costs and selling
price would have already been determined and

Techniques of CVP analysis

There are two basic techniques of CVP analysi

1. Contribution Margin
Analysis
2. Break Even Analysis

Contribution Margin Analysis

Contribution Margin (Rs.) = Sales - Variable Cost

Contribution Margin Ratio or P/V Ratio =
Selling Price - Variable Cost
x 100
Selling Price

Breakeven Analysis
* Breakeven Equation:
Sales = Variable Cost + Fixed Cost
* BEP (in units) =

Fixed Cost

Contribution Margin Per Unit

* BEP (in Rs.) = Fixed Cost

P/V Ratio

Margin of Safety:
It is the difference between the actual sales
and the
breakeven sales for a given period.
In other words it indicates by how much the sales
can decrease
before the firm incurs the loss.
There are two firms A Ltd. and B Ltd.. The sales
and cost
information for these two firms are given below:
A Ltd.
Ltd.
Sales (Units)
10,000

10,000

Angle of Incidence:
It is formed at the intersection of total cost line and
total sales line.
The size of the angle of incidence is indication of
quantum of profit or loss made by firm at different
output/sales level.
A narrow angle of incidence show a slow rate of
profit earning while a wider angle of incidence
indicate a swift rate of profit earning capacity of the
firm.
A narrow angle also indicates that a variable cost
as a proportion to sales is quite high and therefore
very little has been left by way of contribution.

Problem
From the following figures, find the break-even
volume:
Selling price (per tonne)
Variable cost (per tonne)
Fixed Expenses

Rs. 69.50
Rs. 35.50
Rs. 18,02,000

If this volume (BEP) represents 40% capacity, what is

the additional profit for an added production of 40%
capacity above the current level, the selling price of
which is 10% lower and for 20% capacity above the
80% capacity, the selling price of which is 15% lower
than the existing price.

Key Factor / Limiting Factor The factor of production which in short supply is
called as key factor or limiting factor.
The decision regarding profitability of the product
in such situation is based upon profitability of key
factor
Profitability of the key factor =

Contribution
Consumption
of per
unit
key factor per
unit (either in Rs
or in unit of
factor of
Higher the profitability of key factor,
production
better the product

Main key factors -

1. Sales in unit
- Check Contribution per unit higher better.
2. Sales in Rs

- Check P/V ratio - higher better.

3. Raw Material - Check profitability of raw

material - higher better.
4. Time / Labour / Capacity - Check profitability of
labour - higher better.

*Continue
Problem
The Board of Directors of Fortunate Ltd., manufacturing three
Products A, B and C have asked for the advice on the production
mixture of the company

Product A

Product C
Standard Cost per unit:
Direct Materials (Rs.)
10
Variable Overheads (Rs.)
Direct Labour:
Department Rate per hour
Hours
X
Re. 0.50
30
Y
1.00
5
Z
0.50
16
C
Data from current budget:
Production per year
Selling Price per unit (Rs.)
90

Product B

30

20

Hours

Hours

28

16

6
8

10
30

Product A

Product B

Product

10,000

5,000

6,000

50

68

*Concluding Pa

However, the type of labor required by Department

Y is in short supply and it is not possible to increase
the manpower of the department beyond its present
level.
You are required to prepare a statement of the most
profitable mixture of the products to be made and
sold. The statement should show:
(i) the profit expected on the current budgeted
production; and
(ii) the profits which could be expected if the most
profitable mixture was produced.