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CVP Analysis

This document discusses cost-volume-profit (CVP) analysis and break-even analysis. It defines CVP, lists its key features, and explains how businesses can use it to determine breakeven points and profit margins under different sales volumes and cost structures. Numerical examples are provided to demonstrate calculating breakeven points and the profit volume ratio.

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Akhil Jasrotia
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37 views15 pages

CVP Analysis

This document discusses cost-volume-profit (CVP) analysis and break-even analysis. It defines CVP, lists its key features, and explains how businesses can use it to determine breakeven points and profit margins under different sales volumes and cost structures. Numerical examples are provided to demonstrate calculating breakeven points and the profit volume ratio.

Uploaded by

Akhil Jasrotia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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DEPARTMENT : MBA – Industry Collaborated Programs

Faculty Name: CD Singh


Subject Name- Financial Management
Subject Code: 22BBT-671/22BLT-651/22MFT-671/22BFT-671
UNIT-1 (Introduction to Financial Management)

Financial Management DISCOVER . LEARN . EMPOWER


Cost-Volume-Profit (CVP) Analysis
Cost Volume Profit (CVP) analysis is used in cost accounting to
determine how a company’s profits are affected by changes in sales
volume, fixed costs, and variable costs.

It looks into the impact that varying levels of costs and volume have on
operating profit.

2
Features of CVP
1. Cost-volume-profit (CVP) analysis is a way to find out how changes
in variable and fixed costs affect a firm's profit.
2. Companies can use CVP to see how many units they need to sell to
break even (cover all costs) or reach a certain minimum profit margin.
3. CVP analysis makes several assumptions, including that the sales
price, fixed, and variable costs per unit are constant.

3
CVP Analysis is also called Break-Even Analysis
The cost-volume-profit analysis, also commonly known as breakeven
analysis, looks to determine the break-even point for
different sales volumes and cost structures, which can be useful for
managers making short-term business decisions.

The breakeven point is the number of units that need to be sold or the
amount of sales revenue that has to be generated in order to cover the
costs required to make the product.

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Features of Break Even Point

It is a point of no profit no loss

A business concern is said to break-even when its total sales are equal to its total costs.

At BEP, Contribution is equal to fixed cost


In other words, the break-even point where income is equal to expenditure {or) total sales equal to total
cost.
Break Even Chart

Steps for constructing break even chart are as follows:

1. No. of Units (quantity) are plotted on X-axis , Costs and Revenues are plotted on Y-axis,

•Three lines are drawn - Fixed Cost Line, Total Cost Line and Total Sales Line.

•Find the intersection point of the total sales line and total cost line. This is Break Even Point

From intersection point if a perpendicular is drawn to X-axis, we find break even units.

Similarly, from the same intersection point a parallel line is drawn to X-axis so that it cuts Y-axis
, we find Break Even point in terms of value.
Please note :

Angle of Incidence
It is formed at the intersection point of the total cost line and total sales line.

Contribution Break-Even Chart


A contribution breakeven chart is based on the same principles as a conventional break even chart

except for that it shows the variable cost line instead of the fixed cost line. Lines for total cost and
sales revenue remain the same.
Break Even Chart
Mathematically
Fixed Costs
Break-even Sales = -------------------
Contribution Margin

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Numerical
From the following particulars find out break-even point:
Fixed Cost Rs. 1.00.000
Selling price Per unit Rs. 20
Variable cost per unit Rs. 15

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Solution:
Formula : Break-Even Point in Units = FC / Contribution margin
Step I : Contribution per unit = Selling Price per unit - Variable Cost per unit
= 20 -15 = 5
Step II : B E P (in units) = 100000/5 = 20,000 units
Step III : BE P in Sales = 20,000 x Rs. 20 = Rs. 4,00,000

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Profit Volume Ratio (PV ratio)

Profit Volume Ratio is also called as Contribution Sales Ratio


(or) Marginal Income Ratio (or) Variable Profit Ratio.

It is used to measure the relationship of contribution, the


relative profitability of different products, processes or
departments.

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Calculation of PV ratio

13
Numerical – test yourself

14
THANK YOU

For queries
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