Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my- business-economics-and-financial.html Cost-Volume-Profit (CVP) Analysis Cost –volume-profit analysis basically identifies the relationship between those three terms. Use for profit planning process of the firm. Its most common application is break-even analysis. Cost-Volume-Profit (CVP) – Assumptions All cost can be separated in to fixed and variable. Total fixed cost does not change over the given volume range. Per unit selling price and per unit variable cost do not change In the multi product situations, sales mix of the products does not change. Graphical Representation (Break Even Chart) It is a diagrammatic presentation of the break – even point, margin of safety and values of profits and losses at different levels of activity Break even analysis highlights the concept of contribution. Break-even analysis indicates the level of sales at which costs and revenue are in equilibrium. Break-even point can be computed in terms of unit or in terms of monitory value of sales volume or as a percentage of capacity.
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Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html
Cost-Volume-Profit (CVP) Analysis
Cost –volume-profit analysis basically identifies the relationship between those three terms. Use for
profit planning process of the firm. Its most common application is break-even analysis.
Cost-Volume-Profit (CVP) – Assumptions
All cost can be separated in to fixed and variable.
Total fixed cost does not change over the given volume range.
Per unit selling price and per unit variable cost do not change
In the multi product situations, sales mix of the products does not change.
Graphical Representation (Break Even Chart)
It is a diagrammatic presentation of the break – even point, margin of safety and values
of profits and losses at different levels of activity
Break even analysis highlights the concept of contribution.
Break-even analysis indicates the level of sales at which costs and revenue are in
equilibrium.
Break-even point can be computed in terms of unit or in terms of monitory value of
sales volume or as a percentage of capacity.
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html
The Profit/Volume Graph (P/V graph)
The P/V graph is another type of break-even chart which shows the profit or loss at
different levels of activity, usually in terms of sales
The profit/loss at a given level of activity is shown clearly in this diagram which could
be considered a further refinement of previous diagram
However variation of revenue and cost are lost sight of which is an inherent weakness
in this graph
Contribution Margin (CM)
The CVP model can be re-written as
This equation implies that profit fluctuates with changes in contribution
Hence, profit is dependent on contribution
More specifically, profit is directly proportional to contribution
It is that level of activity (output or sales since production is assumed to equal sales) at
which the firm neither enjoys any profit nor incurs any loss
That is the level of output whose contribution margin just covers the fixed costs
Beyond the break-even point every unit sold brings in contribution, which is termed profit