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Cost volume profit analysis

5 important questions on Cost volume profit analysis

What does cost volume profit analysis examines?

CVP examines the relationship between changes in activity and changes in total sales revenue, cost and net profit in the short run. This will enable management to identify critical output levels, such as the breakeven point.

Units sold for target profit (formula)

(fixed cost + target profit) / CM per unit

Profit-volume ratio (also known as contribution margin ratio)

CM / sales. It represents the proportion os each $1 of sales to cover fixed costs and provide for profit. Because we assume the CM and P per unit are constant, our PV ratio is also assumed to be constant.

BE point when multi-product (formula)

BE point = Total FC / Sum of CM per batch

CVP analysis assumptions

1. All other variables remain constant
2. Single product or constant sales mix
3. TC and TR are linear functions of output
4. Profits are calculated on a viable costing basis (doesn't hold for absorption costing), fixed costs incurred during the period, are charge as an expense for that period.
5. Costs can be accurately divided not their fixed and variable elements
6. The analysis applies only to the short term