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Cost Volume Profit Analysis

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique
that is concerned with the effect of sales volume and product costs on
operating profit of a business. It deals with how operating profit is affected
by changes in variable costs, fixed costs, selling price per unit and the
sales mix of two or more different products.CVP analysis has
assumptions.All cost can be categorized as variable or fixed.Sales price
per unit, variable cost per unit and total fixed cost are constant.All units
produced are sold.Where the problem involves mixed costs, they must be
split into their fixed and variable component by High-Low Method, Scatter
Plot Method or Regression Method.The basic formula used in CVP
Analysis is derived from profit equation:CVP analysis also makes use of
following concepts:Contribution Margin (CM)Contribution Margin (CM) is
equal to the difference between total sales (S) and total variable cost or, in
other words, it is the amount by which sales exceed total variable costs
(VC). In order to make profit the contribution margin of a business must
exceed its total fixed costs. In short:Unit Contribution Margin (Unit
CM)Contribution Margin can also be calculated per unit which is called Unit
Contribution Margin. It is the excess of sales price per unit (p) over variable
cost per unit (v). Thus:Contribution Margin Ratio (CM Ratio)Contribution
Margin Ratio is calculated by dividing contribution margin by total sales or
unit CM by price per unit.Costvolumeprofit (CVP), in managerial
economics is a form of cost accounting. It is a simplified model, useful for
elementary instruction and for short-run decisions.CVP analysis expands
the use of information provided by breakeven analysis. A critical part of
CVP analysis is the point where total revenues equal total costs (both fixed
and variable costs). At this break-even point, a company will experience no
income or loss. This break-even point can be an initial examination that
precedes more detailed CVP analysis.CVP analysis employs the same
basic assumptions as in breakeven analysis. The assumptions underlying

CVP analysis are:The behavior of both costs and revenues is linear

throughout the relevant range of activity. (This assumption precludes the
concept of volume discounts on either purchased materials or sales.)Costs
can be classified accurately as either fixed or variable.Changes in activity
are the only factors that affect costs.All units produced are sold (there is no
ending finished goods inventory).When a company sells more than one
type of product, the sales mix (the ratio of each product to total sales) will
remain constant.The components of CVP analysis are:Level or volume of
activity.Unit selling prices,Variable cost per unit,Total fixed costs,Sales mix.
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