The managers of profit-seeking organizations usually study the effects of output volume
on revenue (sales), expenses (costs), and net income net profit. We call this study from
the study of cost-volume-profit (CPV) analysis.
Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and
volume on a company’s profits. CVP analysis is important in profit planning. It also is a
critical factor in such management decision as setting selling prices, determining
product mix and maximizing use of production facilities.
• All costs can analyze into their fixed and variable elements.
• All units produced are selling out and selling price is same per unit.
• When more than one type of product is selling, the sales mix will remain
constant. That is, the percentage that each product represents of total sales will
stay the same. Sales mix complicates CVP analysis because different products
will have different products will have different cost relationships.
CVP analysis considers the interrelationships among the components:-
• Sales Mix
Contribution Margin
Contribution margin is the amount of revenue remaining after deducting variable costs.
Margin of Safety
The planned unit sells less the break-even unit sales. It shows how far sales can fall
below the planned level before losses occur.
Break-Even Analysis
The level of activity at which total revenues equal total costs (both fixed and variable) is
call break-even point. The process of finding the break-even point is call break-even
analysis.
Fixed expenses
Managers can also use CPV analysis to determine the total sales in units and dollars,
needed to reach a target profit.
Miss Shagufta Islam is the manager of Asus’s new PDA Phone segments. She sells
PDA Phone and PDA Phone without camera. Annual fixed costs are 5 00,000. The
variable cost is $ 260 per PDA Phone and $120 per PDA Phone without camera set.
PDA Phone sells for $499 and PDA Phone without camera for $200 per set. Three-
PDA Phone without camera is produce for two PDA Phone.
= $499 – $260
= $ 239
• C. Margin for PDA Phone without camera = Selling price – variable cost
= $200 – $120
= $80
• Total contribution margin of PDA Phone and PDA Phone without camera.
$ 239 X $ 3 = $717
$ 80 * $2 =$160
= $557
Break-even point in number of set (3 PDA Phone without camera 2 PDA Phone)
= fixed cost
= $500000
$ 557
= $ 898 set
Therefore,
Income Statement:
Miss Shagufta Islam sale for the year was 3,000 PDA Phone and 2,300 PDA Phone
without camera.
Income Statement
Sales (3000 PDA & 2,300 PDA without camera) $ 19, 57,000