Cost Volume Profit Analysis (CVP Analysis)
3.1 Introduction
* CVP analysis is a systematic approach of examining the relationship between the changes in volume, cost, revenue and profit. The main objective of this analysis is to establish what will happen to the financial results if a specified level of activity fluctuates. * This analysis is useful especially to plan the future production and sales activity that will enable the firm to maximize profit and at the same time it enables firms to determine the break-even point and the margin of safety of the firm. This information is important to ensure the survival of the firm in the short-run and also in the long-run. * BEP represents the minimum units that the company have to sell before it incurs losses. BEP is a no gain no loss situation where the total revenue is equal to total costs. * Margin of safety shows the maximum units that can be reduced before the company will incur a loss.

3.2 The assumptions underlying the CVP analysis
* Costs can be accurately divided into their fixed and variable elements * Unit variable cost and selling price are constant
* Fixed costs incurred during the period are charged as expenses for that period * Volume is the only factor that will effect the costs and revenues * Single product is sold or multi-products are sold in accordance with pre-determined sales mix * Efficiency and productivity will not change

3.3 The approaches
* Mathematical approach
- The formulae are developed from the following formula:
Net profit=Sales revenue –Total costs
- Break-even point (BEP) is the point of sales volume where the firm is not attaining any profit or loss.

* Contribution approach
- Contribution margin is the excess of total revenues over total variable costs. Unit contribution marginUCM=Selling price-Unit variable costs

* Contribution can be also be expressed as a ratio to sales and...

...Quiz 2
1) Cost-volume-profitanalysis is used primarily by management: A) as a planning tool B) for control purposes C) to prepare external financial statements D) to attain accurate financial results Answer: A Diff: 1 Terms: cost-volume-profit (CVP) Objective: 1 AACSB: Communication 2) One of the first steps to take when using CVPanalysis to help make...

...How to Do CostVolumeProfitAnalysis?
1. Do Price forecasting
Costvolumeprofitanalysis is a branch of cost accounting which is often used in managerial accounting. During price forecasting, emphasis is laid on a number of points like the level of sales essential in order to cover all expenses, the exact number of valves which need to be sold so as to earn a...

...A cost-volume-profitanalysis is a vital factor to a company. It is very important to profit planning. Cost-volume-profit (CVP) analysis is the study of the effects of changes in cost and volume on a company’s profits. It is also a factor in management decisions such as setting selling prices, determining product...

...The relationship between costvolume and profit is shown by cost-volume-profitanalysis. it is an analytical tool for analyzing the relationship among cost, price, profit, sales and production volume. Mainly there are three element in cost-volume-profitanalysis.
It is highly essential for the...

...Cost, Volume, and ProfitCost-Volume-Profit (CVP) analysis is a managerial accounting tool that expresses the simplified relationship between cost, volume, and profit (or loss). CVPanalysis is based on several factors and assumptions and uses a formula to express the relationship by equation or graphically and...

...the total costs involved and the prices they can charge. As a result, they discover they can't sell enough of the product or service to make a profit. One of the most important tools you can use to make better business decisions is the break-even analysis; it enables you to determine with great accuracy whether or not your idea is a profitable one. Best of all, you can use this tool to evaluate every product or service you offer. The break- even point...

...things like CVP because it is a very easy way to address how much money sales a company needs in order to make a profit. They care if the sales mix is accurate because if the sales mix is different, it because a completely different calculation.
B. The first financial model was not useful because it did not separate fixed and variable cost. That means a CVPanalysis cannot be done. It separated costs into...

...Assignment
Limitations of cvpanalysis.
Costvolumeprofitanalysis.
In any business it is very obvious for questions like, what effect on profit can it expect if it produces more products? What quantity of products and services must a business sell in order to break even for the year? What happens to the breakeven point of the business if it decides to add or increase the quantity of a...