Cost Volume Profit Formula

Topics: Variable cost, Costs, Contribution margin Pages: 3 (664 words) Published: April 18, 2010
Cost, Volume, and Profit Formulas
Heather Jauregui
University of Phoenix of Axia College

“The Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a company’s profits.” (Kimmel, P., Weygandt, J., & Kieso, D. 2003) The analysis is used to maximize efficiency in a business. In order to be effective the CVP analysis has to make several assumptions. These assumptions are that the costs can be fitted into either fixed or variable categories. The next assumption is that changes that a business makes in its activities are the only thing that will affect costs. The business must assume that all units of a good or service are sold. The last two assumptions are that “behavior of both costs and revenues is linear throughout the relevant range of the activity index.” (Kimmel, P., Weygandt, J., & Kieso, D. 2003) Finally, if the company produces more than one type of product the mix or percentage of each product type will remain the same. Volume or the level of activity; unit selling price or how much each unit of the product or service is sold for; variable cost per unit such as labor; total fixed cost like rent and utilities, and sales mix are the components that make up the CVP analysis. Contribution margin is the amount of revenue remaining after deducting variable costs. It is often stated both as a total amount and on a per unit basis. (Kimmel, P., Weygandt, J., & Kieso, D. 2003) If the unit selling price increases, the contribution margin will in crease. When the contribution margin increases, the company has more income to apply towards variable costs. If a company makes dog collars the total unit price of the collar is 10 dollars you must subtract the variable costs. Let’s say that labor and the raw materials per unit are 4 dollars. Subtract the variable cost from the total unit price. That leaves 6 dollars per unit to be applied to the fixed costs such as rent and utilities. The table below...
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