📘 CVP ANALYSIS (Cost–Volume–Profit Analysis)
Definition
A technique that studies the relationship between costs, sales volume, selling price, and profit.
Key Assumptions
- Selling price per unit is constant.
- Variable cost per unit is constant.
- Total fixed costs remain constant within the relevant range.
- All output produced is sold.
- Sales mix remains constant (if multiple products).
Key Uses
- Determining BEP (Break-even point)
- Measuring margin of safety
- Profit planning
- Making short-term decisions (pricing, product mix, etc.)
📘 MARGINAL COSTING
Definition
A costing technique where:
- Variable costs are charged to cost units.
- Fixed costs are treated as period costs (charged to P&L directly).
Marginal Cost
Marginal Cost = Variable Cost per Unit
Contribution
Contribution = Selling Price – Variable Cost
Contribution helps cover fixed costs and profit.
Profit
Profit = Total Contribution – Fixed Costs
Advantages
- Helps in decision making (pricing, shutdown, special orders)
- Simple to apply
- Helps measure profitability of products
Disadvantages
- Ignores fixed costs in valuation
- Not accepted for external financial reporting
📘 BREAK-EVEN ANALYSIS
Break-even Point (BEP)
The level of sales where Total Contribution = Fixed Cost → Profit = 0
Formulas
1. BEP (Units)
BEP Units = Fixed Cost / Contribution per Unit
2. BEP (Sales Value)
BEP Sales = Fixed Cost / C/S Ratio
C/S Ratio (Contribution/Sales Ratio)
Also called P/V ratio (Profit–Volume Ratio).
C/S Ratio = Contribution / Sales
or
C/S Ratio = (Selling Price – Variable Cost) / Selling Price
📘 MARGIN OF SAFETY (MOS)
Definition
The difference between actual (or budgeted) sales and break-even sales.
Formula
Margin of Safety = Actual Sales – BEP Sales
MOS %
MOS % = (Actual Sales – BEP Sales) / Actual Sales × 100
Interpretation
- High MOS = Low risk of loss
- Low MOS = High risk of going into loss
📘 RELATIONSHIPS & KEY FORMULAS
1. Profit Formula
Profit = (Sales × C/S Ratio) – Fixed Costs
2. Required Sales for Target Profit
Sales (Units)
Required Units = (Fixed Costs + Target Profit) / Contribution per Unit
Sales (Value)
Required Sales = (Fixed Costs + Target Profit) / C/S Ratio
📘 SIMPLE NUMERICAL EXAMPLE
- SP = $50
- VC = $30
- Contribution = $20
- Fixed Cost = $2,00,000
- C/S ratio = 20/50 = 40%
✔ BEP Units
= 2,00,000 / 20 = 10,000 units
✔ BEP Sales
= 2,00,000 / 0.40 = $5,00,000
✔ If Actual Sales = 8,00,000 → MOS
MOS = 8,00,000 – 5,00,000 = 3,00,000
MOS% = (3,00,000 / 8,00,000) × 100 = 37.5%
CVP (Cost-Volume-Profit) Analysis
CVP analysis is a method used to determine how changes in costs and sales volume affect a company's profit. It helps businesses understand the relationship between costs, volume, and profit.
The break-even point is the sales level at which a company's total revenue equals its total costs, resulting in zero profit. It's calculated as:
BEP (units) = Fixed Costs / Contribution Margin per unit
BEP (sales) = Fixed Costs / Contribution Margin Ratio
Contribution Margin (CM)
Contribution margin is the difference between sales revenue and variable costs. It's the amount available to cover fixed costs and generate profit.
CM = Sales - Variable Costs
CM Ratio = (CM / Sales) x 100
Expected Sales
Expected sales refer to the sales revenue a company anticipates generating during a specific period.
Target Profit
Target profit is the desired profit level a company aims to achieve. It's used to determine the required sales level to achieve that profit.
Marginal analysis is a decision-making tool used to evaluate the additional costs and benefits of a specific action or decision. It focuses on the incremental changes in costs and revenue.
- *Assumes a linear relationship between costs and sales volume*
- *Helps determine the break-even point and target profit*
- *Analyzes the impact of changes in costs and sales volume on profit*
- *Used for decision-making and planning*
- *Assumes a constant sales mix and selling price*
Some common applications of CVP analysis include:
- *Determining the optimal sales mix*
- *Evaluating the impact of price changes*
- *Identifying the most profitable products or services*
- *Making decisions about production and pricing*
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