Cost-Volume-profit analysis is a technique for studying the relationship between cost, volume and profit.  The three factors of CVP analysis i.e., costs, volume and profit are interconnected and dependent on one another. CVP analysis is an important tool of profit planning.

1. Cost-Volume-Profit
Analysis

2. Whatiscost-volume-profit analysis
Cost-Volume-profitanalysis isatechniqueforstudying therelationshipbetweencost,volumeand
profit.
ThethreefactorsofCVPanalysis i.e.,costs,volumeandprofitareinterconnectedanddependenton
oneanother.
CVPanalysis isanimportanttool ofprofitplanning.
Forexample,profit dependsupon sales,sellingpriceto a largeextentdependsuponcostandcost
dependsupon volumeofproduction asitis onlythevariable costthatvariesdirectlywith
production, whereasfixedcostremainsfixedregardlessofthevolumeproduced.

3. Itprovide informationonfollowing matters:
1]Thebehaviorofcostinrelationtovolume.
2]Volumeofproduction/sales,wherebusiness willbreakeven.
3]sensitivity ofprofitsduetovariationinoutput.
4]Amountofprofitfor aprojectedsalesvolume.
5]Quantityofproductionandsalesforatargetprofitlevel.
Cost Volume Profit

4. Techniquesorelementsofcost-volume-
profitanalysis
Contribution Margin
Margin of Safety
Marginal cost Equation
Break-Even Analysis
Profit volume Ratio

5. ContributionMargin
Contributionisthedifference betweensalesandvariablecostormarginalcostof
sales.
Itmayalsobedefinedastheexcessof sellingpriceovervariablecostperunit.
Contributionisalsoknownas ContributionMarginorGross Margin.
Contributionbeingtheexcessof salesovervariablecostistheamountthatis
contributedtowardsfixedexpenses andprofit.
Contribution=Sales–VariableCost
Contribution(perunit)=SellingPrice–VariableCost(perunit)
Contribution=FixedCosts+Profit(-loss)

6. MarginalCostEquation
Sales–Variablecost=Contribution
OR Sales=Variablecost+Fixedcost+Profit/ -Loss
OR Sales–VariableCost =Fixed cost+Profit/-loss
AMarginalcostequationcanbederivedasfollows:
Themarginalcostequationisveryusefulinthesense thatifanythreefactorsoutof the
fourareknown,thefourth caneasilybefoundout.

7. Profit/VolumeRatio
TheProfit/volumeratio,whichisalsocalledthe‘contributionratio’or‘marginalratio’,
expresses therelationofcontributiontosalesandcanbeexpressed asunder:
ImportantforstudyingtheProfitabilityofoperation ofabusiness.
Alsocalled“Contribution/salesratio”
Importantformanagementtofindoutwhichproductismoreprofitable.
P/VRatio=Contribution/Sales
P/Vratio=Sales–Variablecost/Sales
OR P/Vratio=Fixedcost+Profit/Sales
OR P/Vratio=Changeinprofitorcontribution/Changeinsales

8. Theratiocanbeincreasedbyincreasingthecontribution.This
canbedoneby:
(1) Increasingthesellingpriceperunit.
(2)Reducingthevariableormarginalcost.
(3) Changingthesalesmixtureandsellingmoreprofitable
productsforwhichtheP/Vratioishigher.

9. MarginOfSafety
Theexcessofactualorbudgeted salesoverthebreak-evensalesis knownasthemarginofsafety.
Margin ofsafety=Total sales– Break-evenSales
Asatbreak-evenpointthereisnoprofitnoloss,salesbeyondthebreak-evenpointrepresent
marginofsafetybecauseanysalesabovethebreak-evenpointwillgivesomeprofit.
Thesizeofthemargin ofsafetyis animportant indicator ofthestrengthofabusiness. Thelarge
marginofsafetyindicatesthatthebusiness issoundandevenifthereisa substantial fallinsales,
therewillstillbesomeprofit. Ontheotherhand,smallindicatesthatposition ofthebusinessis
comparativelyweak andevenasmalldeclineinthesaleswouldadverselyaffecttheprofitofthe
businessand mayresultintolosses.

10. Themarginof safetycanbeimprovedbytakingthefollowingsteps:
1]Byincreasingthelevelofproduction.
2]Byincreasingthelevelsellingprice.
3]Byreducingthefixedcost.
4]Byreducingthevariablecost.
5]Bysubstitutingunprofitableproductswithprofitableproducts.
6]Byincreasingcontributionbychangingthesalesmixorbydroppingunprofitable
products.