1. Cost-Volume-Profit (CVP) Analysis
Cost –volume-profit analysis basically identifies the relationship between those three terms. Use for
profit planning process of the firm. Its most common application is break-even analysis.
Cost-Volume-Profit (CVP) – Assumptions
 All cost can be separated in to fixed and variable.
 Total fixed cost does not change over the given volume range.
 Per unit selling price and per unit variable cost do not change
 In the multi product situations, sales mix of the products does not change.
Graphical Representation (Break Even Chart)
 It is a diagrammatic presentation of the break – even point, margin of safety and values
of profits and losses at different levels of activity
 Break even analysis highlights the concept of contribution.
 Break-even analysis indicates the level of sales at which costs and revenue are in
equilibrium.
 Break-even point can be computed in terms of unit or in terms of monitory value of
sales volume or as a percentage of capacity.
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-
business-economics-and-financial.html

2. The Profit/Volume Graph (P/V graph)
 The P/V graph is another type of break-even chart which shows the profit or loss at
different levels of activity, usually in terms of sales
 The profit/loss at a given level of activity is shown clearly in this diagram which could
be considered a further refinement of previous diagram
 However variation of revenue and cost are lost sight of which is an inherent weakness
in this graph
Contribution Margin (CM)
The CVP model can be re-written as
Profit (P) = Contribution [(p-v)x] – Fixed Cost (f)
 This equation implies that profit fluctuates with changes in contribution
 Hence, profit is dependent on contribution
 More specifically, profit is directly proportional to contribution
 It is that level of activity (output or sales since production is assumed to equal sales) at
which the firm neither enjoys any profit nor incurs any loss
 That is the level of output whose contribution margin just covers the fixed costs
 Beyond the break-even point every unit sold brings in contribution, which is termed profit
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-
business-economics-and-financial.html

3. Break –even point (BEP)
𝒇𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕
𝑩𝑬𝑷 𝒊𝒏 𝒖𝒏𝒊𝒕𝒔 =
𝒄𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕𝒔
 In order to find out the break-even point in revenue terms the break-even equation can
be multiplied by the price per unit on both sides
𝒇𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕
𝑩𝑬𝑷 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 =
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒑𝒆𝒓 𝒓𝒖𝒑𝒆𝒆 𝒐𝒇 𝒓𝒆𝒗𝒆𝒏𝒖𝒆
 The BEP tends to increase with increase of fixed cost or variable cost per unit
 Further BEP tends to decrease with the decrease of fixed costs or variable cost per unit
or increase of selling price per unit
 It is preferable for any organization to conduct its business with a low break-even point
 The break – even point (units or revenue ) is a very useful summary statistic of the three
parameters
o Price
o Variable cost
o Fixed cost
 Which enables the manager to judge whether a given product line or entire production
division will be profitable at a given level of activity or if not
 Also when it will start generation profits
Margin of Safety (MS)
 It is the excess of sales (assuming production equals sales) over the break-even level sales
 It indicates the amount by which sales can drop before loss making will occur
 MS (Rs) = Sales value – BE sales
 The margin of safety can also be expressed as a percentage
 MS (%) = MSx100/ Sales Value
 It acts as a measure of safety towards a possible fluctuation of sales about the budget value
 Margin of safety is the distance between the given level of activity and the break-even point
 In P/V graph the margin of safety is the distance between the maximum given level of
activity and the break –even point
 Safety of the firm depends on profitability. Profitability depends on margin of safety. Hire
the margin of safety higher the profitability.
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦
 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝑥100
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-
business-economics-and-financial.html

4. Break Even Chart – Uses
 Determination of the break-even point and margin of safety
 Estimation of profits associated with a given level of activity
 Estimation of the level of activity at which a given profit/loss is recorded
 Observation of the variation of costs and sales with level of activity
Break-even analysis under Multi-product situation
This example describe how we can do break-even analysis under multi-product situation
Limitations of CVP analysis
 Sometimes it is difficult to separate cost in to fixed and variable components
 Difficult to use break-even analysis for multi product firm.
 This is a short run concept and limited use in long run planning.
 Assumptions of constant selling price, unit variable cost and fixed cost is not valid
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-
business-economics-and-financial.html