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CVP Analysis

Break even analysis formulas

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Poonam Swami
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9 views2 pages

CVP Analysis

Break even analysis formulas

Uploaded by

Poonam Swami
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Cost-Volume-Profit Analysis

Cost-volume-profit (CVP) analysis is used to determine how changes in costs


and volume affect a company’s operating income and net income. Cost-
volume-profit (CVP) analysis is used to find out how changes in variable and
fixed costs impact a firm’s profit.

Companies can use CVP analysis to see how many units they need to sell to
break even (cover all costs) or, alternatively, how many units they need to
sell to reach a certain minimum profit margin.

Key calculations when using CVP analysis or methods of break-even analysis


are

1. Contribution,
2. P/V ratio,
3. BEP( break even point)and
4. Margin of Safety
 The contribution represents the amount of income or profit the
company made before deducting its fixed costs.
 Profit -Volume Ratio(P/V Ratio): It expresses the relationship
between contribution and sales value. It is also called
‘Contribution/sales ratio’ or ‘Marginal income Ratio’. It is expressed in
percentage.
 Break-even point: The break‐even point represents the level of sales
where net income equals zero. In other words, the point where sales
revenue equals total variable costs plus total fixed costs, and
contribution margin equals fixed cost. BEP is calculated in units for
single product manufacturing firm. In multi -product firms BEP is
calculated in rupees (value)
 Margin of Safety: Excess of expected sales over break-even sales
volume is margin of safety. Greater the sales then BEP, more will be
margin of safety and vice-versa. Margin of safety can be improved by
decreasing fixed cost, increasing selling price, increasing output,
concentrating only on profitable products etc.
 Break even chart is an analysis of the relationship between cost,
volume and profit in the form of graph. Point of intersection of Total
cost line and total sales line represents BEP.

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