Cost-volume-profit analysis examines how changes in costs and sales volume affect a company's profit. It helps management make decisions about pricing, production levels, and facility choice. It shows how volume impacts total costs and profits. Key assumptions are accurate classification of fixed and variable costs and linear relationships. The breakeven point is where sales revenue equals total costs, with no profit or loss. Margin of safety is the difference between actual and breakeven sales levels, indicating a business's soundness.

1. Cost-Volume-Profit Analysis
 It is the study of effects of the changes in the costs and volume
on the profit of the company.
 this study is important for the management as it helps in taking
vital decisions such as pricing of the product, determining product
mix, choice of the production facility etc.
 It also helps the manager in deciding the volume of production
because the higher the volume of production, the lower the total
cost per unit.
 Thus, volume affects the costs and in turn costs affect the
profit.

2. Cost-Volume-Profit Analysis
Assumptions:
►All costs can be accurately classified either into fixed costs or
variable costs
►All cost and revenue behaviour is linear
►All costs are affected by changes in activity only
►All units produced are sold, i.e. there is no unsold stock
►In cases when more than one type of product is sold, the sales
mix will remain constant.

3. Cost-Volume-Profit Analysis
CVP income statement is sometimes also called ‘marginal
costing statement’
CVP income statement:
Total sales
Less Variable Cost
= Contribution
Less Fixed Costs
= Profit
Selling Price = Total Cost + Profit

4. Profit-Volume Ratio or
Contribution Margin Ratio
P/V Ratio is the measure of the contribution per every
rupee sold, to cover fixed cost and to generate profit.
P/V Ratio = (Sales – Variable Cost)
------------------------------- X 100
Sales
Or,
= Selling Price per unit – Variable Cost per unit
------------------------------------------------------------------ X 100
Selling Price per unit

5. Break-Even Analysis
TR TC
Profit VC
Costs/Revenue
Loss
FC
Q1
Output/Sales

6. Break-Even Point
G.R. Crowningshield: Break even point is the point at which sales revenue
equals the cost to make and sell the product and no profit or loss is reported.
This is why this point is called as ‘no profit no loss point’.
If volume of output and sales is less than the break-even level, the business
will incur a loss.
Fixed Costs
BEP = -------------------------------------------
(in units) Selling Price p.u. – Variable Cost p.u.
Or,
Fixed Costs
BEP = --------------------
(in units) Contribution p.u.
Or,
Fixed Costs
BEP = --------------------
(in value) P/V Ratio

7. Break-Even Analysis
 A higher price or lower price does not mean that break even will
never be reached.
 The Break even point depends on the number of sales needed to
generate revenue to cover costs.
 Example 1: Fixed Cost = Rs.24,000
Selling Price = Rs.100 p.u.
Variable Cost = Rs.40 p.u.
 Example 2: Fixed Cost = Rs.10,000
Sales = Rs.40,000
Variable Cost = Rs.24,000
Units sold = 4,000

8. Margin of Safety
 Margin of Safety (MOS) is the difference between the actual sales
and the sales at the break-even level.
Margin of Safety = Actual Sales – Break-even Sales
Or,
Profit Profit X Sales
MOS = ---------- = --------------------
P/V Ratio Contribution
 The size of MOS is a very important indicator of the soundness of a
business.
 Common cause of lower MOS is higher fixed costs.

9. Break-Even Analysis
TR TC
VC
BEP
Costs/Revenue
Margin of safety shows how far
sales can fall before losses made.
Margin of Safety
FC
Q1 Q2 A higher price would lower the
break even point and the margin of
Output/Sales
safety would widen

10. Break-Even Analysis
Links of Break-even to pricing strategies and elasticity:
 Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break
even
 Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even
Elasticity – what is likely to happen to sales when prices are
increased or decreased?
Higher prices might mean fewer sales to break-even but those sales may
take a longer time to achieve.
Lower prices might encourage more customers but higher volume needed
before sufficient revenue generated to break-even