CVP and Break Even Analysis

1. CVP and Break Even Analysis
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2. Purdue University Writing Lab
Cost–Volume–Profit (CVP) Analysis
It is the most popular and simple tool to arrive
at pricing decisions. It is widely used by the
sellers to determine product price and level or
volume of budgeted sales.
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3. Purdue University Writing Lab
Cost–Volume–Profit (CVP) Analysis
 It is widely used by the sellers to determine product price and level or
volume of budgeted sales.
 It studies and establishes the relationship between cost, volume and
profits.
 It is used to determine the impact of costs, quantity and price on the
profits for a period of time.
 The cost, volume and price are the causes whereas income and
profits are the effect.
 Sales price, Variable costs and fixed costs are constant while doing
the analysis.
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4. Purdue University Writing Lab
CVP Analysis
Raju Indukoori
Cost
Volume
Profit
 Fixed Cost
 Variable Cost
 Quantity
 Sales Value
 Profit (Sales – Cost)
 Contribution (Sales – Variable Cost
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CVP Analysis
Raju Indukoori
 Fixed Cost
 Variable Cost
 Quantity
 Sales Value
 Profit (Sales – Cost)
 Contribution (Sales – Variable Cost)
CVP Analysis help the firms to know the impact of changes in cost or
quantity or both on their profits to arrive at break even point and target
sales and profit levels.
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6. Purdue University Writing Lab
CVP Analysis Components
1.Sales Revenue(S)
a. Selling Price (P)
b. Sales Volume or Quantity (Q)
2.Total Cost(TC)
a. Fixed Cost (FC) : Total Fixed Cost and Fixed Cost Per Unit
b. Variable Cost (VC) : Total Variable Cost and Variable Cost Per Unit
3.Profit(P)
4.Contribution
5.Profit-Volume (PV) Ratio
6.Break Even Point
7.Target Profit
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1. Sales / Sales Revenue / Sale Value
It is the income of the company through the sales of the quantity of the
product (Q) for a period of time. It can be seen as follows.
Sales (S) = Price (P) * Sales Volume (Q)
 Selling Price (P) : It is the price of one unit of a product or services.
 Sale Volume (Q): It is the total quantity or volume or number goods
or services sold for a given period of time.
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Sales Problem 1
An automobile company sold 50,000 units of two-wheelers in the last
financial year for Rs 60,000 each and 10,000 units of 3 wheelers @ Rs
2,50,000. Calculate sales revenue of the company for the year.
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Sales Solution 1
An automobile company sold 50,000 units of two-wheelers in the last
financial year for Rs 60,000 each and 10,000 units of 3 wheelers @ Rs
2,50,000. Calculate sales revenue of the company for the year.
Two Wheeler sales = Rs 60,000 * 50,000 = Rs 300,00,00,000
= Rs 300 Cr
Three Wheeler sales = Rs 2,50,000 * 10,000 = Rs 30,00,000
= Rs 250 Cr
Total Sales = Rs 300 Cr + Rs 250 Cr
= Rs 550 Cr
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Sales Problem 2
An automobile company has a total sales of Rs 550 Cr for the last
financial year. If the total sales volume is 60,000, calculate selling price
per unit.
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Sales Solution 2
An automobile company has a total sales of Rs 550 Cr for the last
financial year. If the total sales volume is 60,000, calculate selling price
per unit .
Sales Price Per Unit = Sales Revenue / Sales Volume
= Rs 550 Cr / 60,000
= Rs 91,666.
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2. Total Cost (TC)
 It is the total cost incurred on producing a product or making a
services. It can be classified as the following
a. Fixed Cost (FC): Total Fixed Cost and Fixed Cost Per Unit
b. Variable Cost (VC): Total Variable Cost and Variable Cost Per Unit
 It is seen as a sum of fixed cost (FC) and Variable Cost (VC).
Total Cost (TC) = Fixed Cost(FC) + Variable Cost(VC)
Total Cost Per Unit (TCPU) = Total Cost(TC) / Sales Volume(Q)
Total Cost Per Unit (TCPU) = Fixed Cost Per Unit(FCPU)+Variable Cost Per Unit (VCPU)
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Fixed Costs
 These are the business expenses that are not dependent on the level
of goods or services produced by the business.
 They determines level of production or production capacity.
 They arise from purchase of land, machinery and equipment, etc.
 They are also known as indirect costs or overheads.
 They are more of time-related with periodic payments as follows
– Interest paid on capital borrowed
– Rents paid on Land or Industrial unit or Wear House
– Wages or salaries paid to labor or Employees.
–
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Fixed Cost Calculation
Fixed Cost (FC) = Sales(S) – Profit(P) – Variable Cost (VC)
Fixed Cost (FC) = Fixed Cost Per Unit(FCPU) * Sales Volume(Q)
Fixed Cost Per Unit(FCPU) = Selling Price – Profit Per Unit – Variable Cost Per Unit (VCPU)
Fixed Cost Per Unit(FCPU) = Fixed Cost(FC) / Sales Volume(Q)
–
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Variable Costs
 Variable costs are costs that will increase or decrease in direct
relation to the production volume.
 They are known as direct costs as they are directly proportional to
the volume of production or sales.
 Variable costs include cost of raw material, packaging, power, fuel, etc.
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16. Purdue University Writing Lab
Cost Based Pricing Problem
The cost and sales information of a firm is as follows.
 Fixed cost : Rs 3.67 Cr
 Variable Cost : Rs 3,500 per unit
 Volume of sales : 1,00,000
Calculate the cost per unit for the firm to arrive at pricing decisions based on the cost
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Cost Based Pricing Solution
The cost and sales information of a firm is as follows.
 Fixed cost : Rs 3.67 Cr
 Variable Cost : Rs 3,500 per unit
 Volume of sales : 1,00,000
Calculate the cost per unit for the firm to arrive at pricing decisions based on the cost.
 Fixed cost = Rs 3.67 Cr
 Variable Cost = Rs 3,500 per unit
 Volume of sales = 1,00,000
Total Cost = Fixed cost + Variable Cost
= Rs 3.67 Cr + (Rs 8,500 * 1,00,000)
= Rs 3.67 Cr + Rs 8.5 Cr = Rs 12.17 Cr
Total Cost Per Unit = Total cost / Sales quantity
= Rs 12.17 Cr / 1,00,000 = Rs 12,117
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3.Profit
 It is the surplus of revenue or income over expenses or cost of producing a
product or making a service.
 It is the comparison of the total sales and total cost or total expenditure.
Profit / Loss = Sales(S) - Total Cost (TC)
= Sales – (Fixed Cost + Variable Cost)
= Sales – Fixed Cost – Variable Cost
Profit is the positive outcome of the above equation. If the outcome is negative, it
is loss.
Profit per unit = Profit / Quantity of sales.
Profit Percentage = (Profit / Sales )*100 or (Profit Per Unit / Price) * 100
Above equation is in CVP Analysis. In an investor point of view it is (Profit / Total Cost )*100
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Profit Problem
Calculate profit, profit per unit and profit percentage of a firm has the sales data
as follows.
 Revenue : Rs 2.5 Cr
 Fixed Cost : Rs 1.0 Cr
 Variable Cost : Rs 50 Lakh
 Sales Volume : 75,000
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Profit Solution
Calculate profit, profit per unit and profit percentage of a firm has the sales data
as follows.
 Revenue : Rs 2.5 Cr
 Fixed Cost : Rs 1.0 Cr
 Variable Cost : Rs 50 Lakh
 Sales Volume : 75,000
Profit / Loss = Sales – Fixed Cost – Variable Cost
= Rs 2.5 Cr – Rs 1.0 Cr – Rs 0.50 Cr = Rs 1 Cr
Profit per unit = Profit / Quantity of sales.
= Rs 1,00,00,000 / 75,000 = Rs 133.33
Profit Percentage = (Profit / Sales )*100
= (Rs 1 Cr / Rs 2.5Cr)* 100 = 40%
or
=(Profit Per Unit / (Sales Revenue / Sales Volume)) * 100
= (Rs 133 / (Rs 2.5 Cr / 75,000))*100
= (Rs 133 / Rs 333.33)*100 = 40%
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4.Contribution
 This is the basis of Break Even Analysis.
 It represents the portion of a companies revenue out of sales that is
not consumed by variable costs and so contributes to the coverage of
fixed costs.
 It is the net of selling price per unit after variable cost per unit.
 This is more important to capital intensive industries.
 It has the following components.
– Total Contribution Margin
– Contribution Margin Ratio
– Contribution Margin per Unit
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Contribution
Contribution (C) / Contribution Margin=
Contribution Per Unit (CPU) =
Contribution Per Unit (CPU) =
Contribution Margin Ratio (CMR)=
Contribution Margin Ratio (CMR)=
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Sales (S) – Variable Cost (VC) = S – C
Contribution (C) / Sales Volume(Q) = C / Q
Price(P) – Variable Cost per unit(VCPU) =P–VCPU
Contribution Per Unit(CPU) / Price (P) = CPU / P
Contribution (C) / Sales (S) = C / S
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Contribution Problem 1
Calculate Contribution margin and Contribution per unit from the
following information of a firm.
 Selling Price : Rs 3,500
 Variable Cost : Rs 1,900 Per Unit
 Sales quantity : 2,00,000
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Contribution Solution 1
Sales (S) = Price (P) * Sales Volume (Q) = P * Q
= Rs 3,500 * 2,00,000 = Rs 7,00,00,000
Variable Cost (VC) = Variable Cost Per Unit (VCPU) * Sales Volume (SV) = VCPU * SV
= Rs 1,900 * 2,00,000 = Rs 3,80,00,000
Contribution Margin (C)= Sales(S) – Variable Cost (VC) = S – VC
= Rs 7,00,00,000 – Rs 3,80,00,000 = Rs 3,20,00,000
Contribution Per Unit (CPU) = Contribution(C) / Sales Volume (Q)
= Rs 3,20,00,0000 / Rs 2,00,000 = Rs 1,600
Contribution Per Unit (CPU) = Price (SP) – Variable cost per unit (VCPU) = P– VCPU
= Rs 3,500 – Rs 1,900 = Rs 1,600
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Contribution Problem 2
Calculate the contribution margin and contribution per unit of a firm with the
following details
 Sales quantity : 2,00,00,000
 Sales revenue : Rs 7,50,00,000
 Variable Cost : Rs 4,50,00,000
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Contribution Solution 2
Sales quantity : 2,00,00,000
Sales revenue : Rs 7,50,00,000
Variable cost : Rs 4,50,00,000.
 Contribution Margin = Sales revenue – Variable Cost
= Rs 7,50,00,000 – Rs 4,50,00,000 = Rs 3,50,00,000
 Contribution Per Unit = Contribution / Sales Quantity
= Rs 3,50,00,000 / Rs 2,00,00,000 = 1.75
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Contribution Problem 3
Calculate the contribution margin and contribution per unit of a firm with the
following details.
 Sales quantity : 2,00,00,000
 Sales revenue : Rs 7,50,00,000
 Variable Cost : Rs 4,50,00,000
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Contribution Solution 3
Calculate the contribution margin and contribution per unit of a firm with the
following details.
 Sales quantity : 2,00,00,000
 Sales revenue : Rs 7,50,00,000
 Variable Cost : Rs 4,50,00,000
Contribution Margin = Sales revenue – Variable Cost
= Rs 7,50,00,000 – Rs 4,50,00,000
= Rs 3,50,00,000
Contribution Per Unit = Contribution / Sales Quantity
= Rs 3,50,00,000 / Rs 2,00,00,000 = 1.75
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29. Purdue University Writing Lab
5.PV Ratio
• It is the ratio of contribution and Sales. It is also known as
• Contribution Ratio
• Contribution Margin Ratio’
• It is the contribution margin ratio or proportion or percentage.
PV Ratio = (Contribution / Sales) * 100
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30. Purdue University Writing Lab
PV Ratio Problem 1
Calculate PV Ratio from the following information.
 Price : Rs 3,500
 Variable Cost : Rs 1,900 Per Unit
 Sales quantity : 2,00,000
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PV Ratio Solution 1
Sales (S) = Selling Price (SP) * Sales Volume (Q) = SP * Q
= Rs 3,500 * 2,00,000 = Rs 7,00,00,000
Variable Cost (VC) = Variable Cost Per Unit (VCPU) * Sales Volume (SV) = VCPU * SV
= Rs 1,900 * 2,00,000 = Rs 3,80,00,000
Contribution Margin (C)= Sales(S) – Variable Cost (VC) = S – VC
= Rs 7,00,00,000 – Rs 3,80,00,000 = Rs 3,20,00,000
Contribution Per Unit (CPU) = Contribution(C) / Sales Volume (Q)
= Rs 3,20,00,0000 / Rs 2,00,000 = Rs 1,600
Contribution Per Unit (CPU) = Selling Price (SP) – Variable cost per unit (VCPU) = SP– VCPU
= Rs 3,500 – Rs 1,900 = Rs 1,600
PV Ratio = Contribution Per Unit (CPU) / Selling Price (P) = CPU /
P
= Rs 1,600 / Rs 3,500 = 0.457
PV Ratio = Contribution / Sales = C/S
= Rs 3,20,00,000 / Rs 7,00,00,000 = 0.457
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PV Ratio Problem 2
What is the PV ratio of a firm with following details
 Fixed cost : Rs 5 Cr
 Variable Cost : Rs 3 Cr
 Sales quantity: 10,560
 Selling Price Per Unit : Rs 4,500
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PV Ratio Problem 2
What is the PV ratio of a firm with following details
 Fixed cost : Rs 5 Cr
 Variable Cost : Rs 3 Cr
 Sales quantity: 10,560
 Selling Price Per Unit : Rs 4,500
Contribution = Sales Revenue - Variable cost
= (Rs 4,500 * 10,560) – Rs 3 Cr
= Rs 4.75 Cr – Rs 3 Cr = Rs 1.75 Cr
PV ratio = (Contribution/ Sales ) * 100
= (Rs 1.75 Cr / Rs 4.75 Cr) = 37%
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6.Break Even
 It is also known as break even point.
 Break even is a point where the firm has neither profits not
losses.
 It is a situation where you are neither making money nor
losing money, but all your costs have been covered.
 At this point, the firm equates its total cost with its total
revenue.
 Firms with low fixed costs will have a low break-even point of
sale and vice versa.
 This is widely used for pricing decisions.
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Break Even Analysis
 It is the study of interrelationships among a firm’s sales, costs,
and operating profit at various levels of output.
 It analyses operating profits or losses along with variety of
cost elements moving with the quantity of sales or production.
 It is a tool to determine level or stage of a company in terms
of profits
 It determines number of products or services a company
should sell to cover its costs (particularly fixed costs).
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Importance of Break Even Analysis
A. Business Model Transformation
B. New Product
C. Start Up
D. Foreign Business
E. Outsourcing
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Break Even Point (BEP)
Break Even point (BEP) is the point where the total cost (TC) is equal to
total revenue (TR). Break Even Point (BEP) is where
• Total Cost (TC) = Total Revenue (TR)
BEP TR = TC
• Total Cost (TC) = Total Revenue (TR)
BEP TR – TC = 0
Break Even Sales / Revenue = Fixed Cost / PV Ratio
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Break Even Point (BEP)
TC = Total Cost
TR = Total Revenue
L = Loss Zone
P = Profit Zone
B = Break Even Point
Q = Quantity Produced or Sold
TR
TC
Q
Cost or
Revenue
P1
Q1 Q2
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P2
B1
B2
B3
L1 L2
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Linear Break Even Point (BEP)
Total revenue and total cost may be linear with a
given small range of outputs and following
assumptions.
 One product line.
 Constant selling price or Marginal Revenue (MR).
 Constant marginal cost (MC).
 No time lags among investment and its revenue generation.
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Linear Break Even Point (BEP)
 TR is the function of product
price (P)
 TR is through origin with a slope
of P.
 TC is the function of Fixed cost
(FC) and Marginal or Variable
cost (VC) with VC as its slope.
 BEP = Intersection of TC and TR
is the break-even point
TR
QBE
TC
BEP
Quantity
Cost or Revenue
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Linear Break Even Point (BEP)
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Why Break Even Point (BEP)
Break even analysis is done to know the Break Even Point (BEP) which
enables to find out the following.
 Break Even Quantity(BEQ)
 Break Even Sales Value(BES)
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Break Even Quantity(BEQ)
• Break Even quantity is the quantity which sets total sales or revenue to
total cost. The firm understands its break even quantity for a given
sales budget or annual sales.
Break Even Quantity = Fixed Cost / Contribution per unit
= FC / CPU
 If break even sales BES is given we can find break even quantity
Break Even Quantity = Break Even Sales / Selling Price
= BES / SP
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Break Even Quantity Problem
Calculate break-even sales units with the given information below
 Sales quantity : 1,00,00,000 Units
 Sale revenue : Rs 5,00,00,000
 Fixed cost : Rs 3,00,00,000
 Variable cost : Rs 1,00,00,000
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45. Purdue University Writing Lab
Break Even Quantity Solution
Calculate break-even sales units with the given information below
 Sales quantity : 1,00,00,000 Units
 Sale revenue : Rs 5,00,00,000
 Fixed cost : Rs 3,00,00,000
 Variable cost : Rs 1,00,00,000
Solution
Fixed Cost = Rs 3,00,00,000
Contribution = Sales revenue – Variable cost
= Rs 5,00,00,000 – Rs 1,00,00,000 = Rs 4,00,00,000
Contribution per unit = Contribution Margin / Sales units
= Rs4,00,00,000 / Rs 1,00,00,000 = Rs 4
Break Even Quantity = Total Fixed Cost / Contribution per unit
= Rs 3,00,00,000 / Rs 4 = 75,00,000 units
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46. Purdue University Writing Lab
Break Even Sales(BES)
• Break Even Sales (BES) is revenue which sets total sales or revenue to
total cost. The firm understands its break even sales for a given sales
budget or annual sales.
Break Even Sales (BES) = Fixed Cost / PV Ratio
= FC / PV
 If break even sales BES is given we can find break even quantity
Break Even Sales (BES) = Break Even Quantity*Selling Price
= BEQ * SP
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Break Even Sales Value Problem
Calculate break-even sales revenue with the given information below
 Sales quantity : 1,00,00,000 units
 Sale revenue : Rs 5,00,00,000
 Fixed cost : Rs 3,00,00,000
 Variable cost : Rs 1,00,00,000
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Break Even Sales Value Solution
Calculate break-even sales units with the given information below
 Sales quantity : 1,00,00,000 Units
 Sale revenue : Rs 5,00,00,000
 Fixed cost : Rs 3,00,00,000
 Variable cost : Rs 1,00,00,000
Solution
Fixed Cost = Rs 3,00,00,000
Contribution = Sales revenue – Variable cost
= Rs 5,00,00,000 – Rs 1,00,00,000 = Rs 4,00,00,000
PV Ratio = Contribution Margin / Sales Value
= Rs 4,00,00,000 / Rs 5,00,00,000 = 0.80
Break Even Sales Value = Total Fixed Cost / PV Ratio
= Rs 3,00,00,000 / 0.80
= Rs 3,75,00,000
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49. Purdue University Writing Lab
7. Target Profit / Volume
 It is the quantity of output at which a targeted total
profit would be achieved
Target volume = (FC + Profit)/(P – VC)
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50. Purdue University Writing Lab
Target Profit / Volume - Problem
Find out the Target Volume of a firm with following details.
Fixed Cost : Rs 10 Cr
Variable Cost : Rs 5,000 Per Unit
Target Profit : Rs 4.5 Cr
Selling Price : Rs 12,500 Per Unit
Target volume = (FC + Profit)/(P – VC)
= (Rs 10 Cr + Rs 4.5 Cr) / (12,500 – Rs 5,000)
= Rs 14,50,00,000 / Rs 7,500 = 19,333 Units.
Target Volume to be produced or sold is 19,33,333 units
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Importance of CVP Analysis
Variety of business organizations make pricing and other related
decision using CVP Analysis, They Include the firms engaged in the
following situations.
A. Business model shift
B. New product launch
C. Start Up
D. Foreign business
E. Outsourcing Business
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A. Business Model Shift
This is more important as it becomes inevitable to control cost
elements due to regulation, law, competition and other uncontrollable
factors Like
 Automation : Impact profit is measured. More important
to manufacturing companies
 Computerization: Service companies like banks and hotels
 Meeting environmental protection norms: Automobile from
BSIV to BS VI.
 Shifting from retail to online: Electronic and FMCG
Products.
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B. New Product
Product differentiation has become a mantra for the
corporate houses inducing to launch a new product in
various forms.
 New product: in terms of design, utility, price, etc
Ex: Tesla launches Cyber Truck.
 New product based on the existing product design.
Ex: Hyundai launches Venue (Creta design).
 New product launched in different segment:
Ex: Honda’s Amaze (Sedan Car based on Hatch Back Brio).
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C. Startup
 It is the decision to start or not to start the
business.
 It makes the business idea is viable or not.
 It will make you experience the realities about
cost and profits elements.
 It also helpful on pricing strategy.
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D. Foreign Business
Domestic product gets launched in foreign markets
adding variety of cost elements making the product price
decisions complicated. The cost elements are as follows.
– Import duty
– Export duty
– Foreign exchange rate
– Taxes on foreign markets
– Transportation costs
– Handling costs
– Forwarding and clearing costs
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E. Outsourcing
 This arises when there domestic costs are higher to the
company or to the country inducing the business
processes to out sources.
 At this juncture the outsourcing (BPO / KPO) or making
for yourself decision becomes critical through
comparison.
 Break even analysis enables to give the quantified
inputs for both the alternative and arrive at a decision.
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Other factors
 Determine the impact of change in price on profits.
 Determine the amount of losses that could be sustained if there is
a sales downturn.
 Determine unused or under utilized capacity which will help to
show the maximum profit on a particular product/service that can
be produced or generated.
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Thank You
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All questions can be posted in the comments below
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