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Basic CVP Summary: Sir Taha Popatia

Cost volume profit (CVP) analysis examines the relationship between costs, volume, and profit at different activity levels. The breakeven point is where there is no profit or loss and is calculated as total fixed costs divided by the contribution per unit. The margin of safety is the difference between actual and breakeven sales/units and shows the capacity to absorb losses. CVP relationships can be depicted graphically using breakeven charts, which plot sales revenue and costs to identify the breakeven point as their intersection.

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62 views2 pages

Basic CVP Summary: Sir Taha Popatia

Cost volume profit (CVP) analysis examines the relationship between costs, volume, and profit at different activity levels. The breakeven point is where there is no profit or loss and is calculated as total fixed costs divided by the contribution per unit. The margin of safety is the difference between actual and breakeven sales/units and shows the capacity to absorb losses. CVP relationships can be depicted graphically using breakeven charts, which plot sales revenue and costs to identify the breakeven point as their intersection.

Uploaded by

Rumana Sharif
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Basic CVP summary

 Cost volume profit analysis is the study of the interrelationships between costs, volume and profit at
various levels of activity.
 Breakeven point is the activity at which there is neither profit nor loss.
 Breakeven point (units) = Total fixed cost / Contribution per unit.
 Contribution to sales ratio is a measure of how much contribution is earned from each $1 of sales.
 C/S ratio = Contribution per unit / Selling price per unit or C/S ratio = Total contribution / Sales
revenue.
 Breakeven point (rupees) = Breakeven point in units x Selling price or Breakeven point (rupees) =
Fixed cost / Contribution to sales ratio.
 Margin of safety is the difference between actual sales and breakeven sales.
 Margin of safety may also be expressed in percentages.
 Margin of safety (units) = Actual sales units – Break even sales units.
 Margin of safety (rupees) = Actual sales revenue – Breakeven sales revenue.
 Margin of safety (%) = Margin of safety (units) / Actual units or Margin of Safety (%) = Margin of
safety (rupees)/ Actual sales revenue.
 At breakeven point 1. Sales revenue = Total costs 2. Total contribution = Fixed costs.
 Target profit (units) = (Fixed cost + target profit) / Contribution per unit.
 Target profit (rupees) = Target profit (units) x Selling price per unit or Target profit (rupees) = (Fixed
cost + target profit) / Contribution to sales ratio.
 Breakeven point can also be determined graphically using a breakeven chart or a contribution
breakeven chart.
 Breakeven chart has the following axes: Horizontal axis shows sales/output (in value or units) and
Vertical axis shows $ for sales revenue and costs
 Breakeven chart shows 1. Sales revenue line 2. Fixed cost line 3. Total cost line.
 Breakeven point on the chart is the intersection of sales revenue and total cost line.
 Distance between breakeven point and actual sales indicates margin of safety.

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Basic CVP summary

 Contribution (or contribution breakeven) chart is a diagram which is very similar to breakeven chart
the only difference is that there is a variable cost line instead of fixed cost line in it.


 Profit/volume chart is a variation of the breakeven chart which illustrates the relationship between
profit to sales.
 Profit/volume chart has following axis: Horizontal axis represents sales revenue and Vertical axis
represents profit/loss.
 It starts from y-intercept representing fixed cost amount at the level of production of zero. Its
gradient shows the contribution to sales ratio. The line moves upwards and cuts the x axis at
breakeven point.

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