The video is about basic COST VOLUME PROFIT (CVP) ANALYSIS, INTRODUCTION: Definition: It is a costing method used to analyse the relationship between cost and volume and how they influence profitability in an organisation. Costs can be variable, semi variable, fixed or semi fixed, as the volumes change with the level of activity. Adjustments have to be made to isolate the variable and fixed cost components first. CVP analysis can be used by companies to determine the level of activity or volume of output that will enable it to make profits, zero profits (break-even point) or losses. CVP analysis is also referred to as BREAK EVEN ANALYSIS. CVP analysis is useful for managers making short-term business decisions, relating to production and sales. CVP analysis makes several basic assumptions, relating to sales price, fixed costs, variable costs and activity levels. The break-even point is the quantity / volume of activity needed to be produced and sold or the amount of sales revenue that has to be generated to cover up the costs required to make the product. BASIC ASSUMPTIONS OF THE CVP ANALYSIS Sales price per unit is constant, Variable cost per unit is constant, Fixed cost is constant, The company produces and sells all its output (Opening and closing stock are Zero). All changes in revenue and expenses occur because of changes in activity level. FORMULAE General formula: Profit (P)=Sales (S) -Variable costs (VC)-Fixed costs (FC) At break-even point: Profit (P)=0 Therefore: Sales –Variable costs = Fixed costs Contribution margin = Sales –Variable costs The contribution margin represents the difference between revenue generated for each product/unit sold and the variable portion of the firm's costs. Therefore: at Break-even point, Contribution margin=Fixed costs Contribution margin per unit X Number of units = Fixed costs Therefore, number of units at break-even point=Fixed costs/Contribution margin per unit Contribution margin ratio = Contribution margin per unit/Selling price per unit Break even sales volume: By dividing the total fixed costs by the contribution margin ratio, the breakeven point of sales in terms of total dollars may be calculated. For example, a company with $200,000 of fixed costs and a contribution margin of 45% must earn revenue of $444,445 (200,000/45%) to break even. For a targeted profit figure, then the formula becomes: Contribution margin=Fixed costs + Profit Example: The same company needs a profit of $70,000. How much sales revenue is needed? Answer: Divide $270,000 ($200,000 + $70,000) by the contribution margin of 45%, yielding a required sales revenue of $600,000. SPECIAL ADJUSTMENTS Semi-variable and semi-fixed expenses must be split between expense Variable and fixed components using costing techniques such as; the high-low method, scatter graph or regression analysis. This will enable us to isolate the variable and fixed expenses and apply them in the formula accordingly.