Cost-Volume-Profit Analysis

(Contribution Margin)

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Introduction
Earning of maximum profit is the ultimate
goal of almost all business enterprises. The
amount of profit on the sales of a product
depends upon volume of production and its
costs. The study of relationship among these
three important factors viz, cost, volume,
profit is known as Cost-volume-profit
analysis.

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Cost volume profit(CVP) may be

explained as under
There is negative relationship between
volume of production and cost of
production i.e., with the increase in volume
of production there are chances of decrease in
cost per unit.
There is negative relationship also between
cost of production and amount of profit i.e.,
decrease in cost of production results in
increase in amount of profits.
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Cont
There is positive relationship between volume
of production and amount of profits i.e.,
amount of profit increase with the increase in
volume of production.
Cost volume profit analysis is a technique of
management accounting which determines
profit, cost and sales values at different
levels . It also establishes relationship among
these factors.
Irwin/McGraw-Hill

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Importance or objectives of
CVP analysis
Setting up flexible budget: flexible budget
which indicates that what trend of amount of
sales and cost of production at different levels
of activities.
Determination of B.E.P.: the most important
objective is to find out break even point, i.e.,
the point of no profit no loss.
Profit Planning: Determine the amount of
profits at different level of activities.
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 Performance evaluation for control: on the

basis of profit achieved and cost incurred it
can be analyzed that what is the roll of volume
of production and others factors was in
effecting the amount of profit?
Helpful in price fixation: the effect of
different price structures on cost and profit

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Break Even Point

Break even point is that point of production or sales
at which firm neither earns any profit nor incurs any
loss. It is also known as No Profit Point.

The break even point is that point of sales volume

where total revenues and total expenses are equal, it is
also said as the point of zero profit or zero loss.
- Charles Horngren.

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Cost-Volume-Profit Graph
450,000
400,000

Sales in Rupees

350,000
300,000
250,000
200,000

Fixed expenses

150,000
100,000
50,000
-

Irwin/McGraw-Hill

100

200

300

400

Units Sold

500

600

700

800

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Cost-Volume-Profit Graph
450,000
400,000

Sales in Rupees

350,000
300,000

Total expenses

250,000
200,000
150,000
100,000
50,000
-

Irwin/McGraw-Hill

100

200

300

400

Units Sold

500

600

700

800

The McGraw-Hill Companies, Inc.

Cost-Volume-Profit Graph
450,000

Total sales

400,000

Sales in Rupees

350,000
300,000
250,000
200,000
150,000
100,000
50,000
Irwin/McGraw-Hill

100

200

300

400

Units Sold

500

600

700

800

The McGraw-Hill Companies, Inc.

Cost-Volume-Profit Graph
450,000

Break-even
point

400,000

Sales in Rupees

350,000
300,000
250,000
200,000
150,000
100,000
50,000
Irwin/McGraw-Hill

100

200

300

400

Units Sold

500

600

700

800

The McGraw-Hill Companies, Inc.

Cost-Volume-Profit Graph
450,000
400,000

Sales in rupees

350,000

it
f
o
Pr

300,000
250,000

a
e
r
a

200,000
150,000
100,000

s
o
L

50,000

a
e
r
sa

Irwin/McGraw-Hill

100

200

300

400

Units Sold

500

600

700

800

The McGraw-Hill Companies, Inc.

Graph of B.E.P

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc.

Formula of B.E.P.
B.E.P. =
rupees

FC
---------------*sales
contribution

B.E.P. = Fixed cost

----------------P/V Ratio

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B.E.P. in Units
B.E.P. =

FC
----------------contribution per unit

Sales- variable =contribution

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Calculate B.E.P.
Fixed cost 500000
Variable cost 2p.u.
Selling price 4 p.u.
Answers
250000 units
1000000 Rs
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The McGraw-Hill Companies, Inc.

Profit Volume Ratio

It is a ratio of contribution to sales and is
expressed generally in terms of percentage.
It is also known as contribution ratio.
p/v ratio is the most important ratio for
studying the profitability of operation of a
business.
The concept of p/v ratio is also useful to
calculate the B.E.P., the profit at a given
volume of sales , the sales value to earn a
desired profit.
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The McGraw-Hill Companies, Inc.

 Comparison of p/v ratio for different

products can be used to find out which
product is Profitable.
Higher the p/v ratio more will be the
profit and vice versa.
Every concern aims to increase p/v
ratio . The ratio can be improved by
Increasing the selling per unit.
Reducing the variable cost.
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Formula of P/V Ratio

1)

2)

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Sales variable cost

-------------------------*100
Sales
FC+ profit
------------*100
Sales

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When more than 2 yr sales and

profit are given
Change in profit
----------------------*100
Change in sales

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Calculate P/V Ratio

Sales 80000

variable cost 60000

Fixed cost 30000 and profit 20000

sales 100000

Answer 25%
50%
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Margin of Safety
Margin of safety is an important indicator of
the strength of the business. If the margin
of safety is large, the position of the
business will be sound and it can easily
resist the situation of reduction in sales .
Increase in selling price
Increase in volume of production
Reduction in fixed and variable cost
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Formula of Margin of Safety

M.O.S.= SALES B.E.P

M.O.S.= PROFIT
------------*100
P/V RATIO

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Calculate M.O.S.
Profit 15000, P/V ratio 40%
Sales 300000 B.E.P. 450000
Sales 20000 units, B.E.P 15000 units
Answer
1-37500
2-No margin of safety.
3-5000 units
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Calculate
From the particular calculate 1) p/v ratio.
2)sales required to earn a profit of Rs
40000/- and 3)profit when sales are Rs
120000/1

140000 sales

Profit 15000

160000 sales

20000 profit

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Solution
p/v ratio calculate = change in profit
---------------------change in sales
20000-15000
--------------------- *100
160000-140000
25% Answer
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2)sales required to earn a profit of

Rs 40000/Sale = FC+ desired profit
------------------------P/V Ratio
Fixed cost=sales* P/V ratio-profit
160000*25%-20000 =20000
Answer

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The McGraw-Hill Companies, Inc.

 20000+40000
-----------------------=
25%

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240000 Answer

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3)profit when sales are Rs

120000/ Profit =sales *p/v ratio- fixed cost

Profit = 120000*25%-20000=
10000 Answer

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The McGraw-Hill Companies, Inc.

QB
The fixed cost amounting to RS 50000
and the % of variable cost to sales are
given to be 66.66%. IF 100% capacity
sales are Rs 300000/ find out BEP and
the % of sales incurred
FC Rs 50000
Percentage of variable cost 66.66%
Capacity 300000
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The McGraw-Hill Companies, Inc.

 P/v ratio = 100- 66.666%= 33.33%

B.E.P.= FC
50000
--------= ----------- *100 = 150000
P/v Ratio 33.33%
Capacity of B.E.P = B.E.P. in RS
-------------------Capacity in Rs
150000
-----------*100 = 50%
300000
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The McGraw-Hill Companies, Inc.