Cost Volume Profit Analysis

Cost

Fixed Cost Marginal Cost

Contribution =
Variable Cost
Sales - Variable Cost

What is CVP Analysis

Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect
a firm's profit. Companies can use CVP to see how many units they need to sell to break even (cover all
costs) or reach a certain minimum profit margin.

Usage:
• It helps us to determine the level of sales that an entity needs to make to survive in the
market.
• The quantity of finished goods that an entity should produce.
• The level of sales at which the entity gets Break-even point.

Srabon Barua
MBA Business Analytics (2nd Semester)
Fixed Costs:
This refers to the cost that an entity needs to incur irrespective of production. These are costs that do not
change when sales or production volumes increase or decrease.

Variable Costs:
A variable cost is a corporate expense that changes in proportion to how much a company produces
or sells. Variable costs increase or decrease depending on a company's production or sales volume, i.e.,
they rise as production increases and fall as production decreases.

Total Cost:
It refers to the combination of Fixed costs and variable Costs. So Total Cost equals to Fixed Costs +
Variable Costs.

Srabon Barua
MBA Business Analytics (2nd Semester)
Break-even Point:
The break-even point refers to the amount of revenue necessary to cover the total fixed and variable
expenses incurred by a company within a specified time period. This revenue could be stated in
monetary terms, as the number of units sold or as hours of services provided.
Formula:

Fixed Costs
• Break Even Point (In Terms of Unit) =
Contribution Per Unit

Fixed Costs Fixed Costs

• Break Even Point (In Terms of $) = 𝑃 = 𝐶⁄ 𝑅𝑎𝑡𝑖𝑜
⁄𝑉 𝑅𝑎𝑡𝑖𝑜 𝑆

• 𝐏⁄ 𝐑𝐚𝐭𝐢𝐨 = 𝐂⁄ 𝐑𝐚𝐭𝐢𝐨 = 𝐒𝐚𝐥𝐞𝐬−𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐂𝐨𝐬𝐭

𝐕 𝐒 𝐒𝐚𝐥𝐞𝐬

Margin Of Safety:
The difference between the actual sales volume and the break-even sales volume is called the margin
of safety. It shows the proportion of the current sales that determine the firm’s profit.
Formula:
• Margin of Safety = Actual sales volume – Break-even sales volume
= Actual sales Revenue – Breakeven Sales Revenue

•
𝐀𝐜𝐭𝐮𝐚𝐥 𝐬𝐚𝐥𝐞𝐬 𝐯𝐨𝐥𝐮𝐦𝐞 – 𝐁𝐫𝐞𝐚𝐤𝐞𝐯𝐞𝐧 𝐬𝐚𝐥𝐞𝐬 𝐯𝐨𝐥𝐮𝐦𝐞
Margin of Safety = x 100%
𝐀𝐜𝐭𝐮𝐚𝐥 𝐬𝐚𝐥𝐞𝐬 𝐯𝐨𝐥𝐮𝐦𝐞
• Profit = Margin of Safety x P/V Ratio

Example 01:
ABC Limited has entered into the business of making Electrical fans. The management of the company is
interested in knowing the breakeven point at which there will be no profit/loss. Below are the details
pertaining to the cost incurred:

Srabon Barua
MBA Business Analytics (2nd Semester)
No. of units sold by ABC limited: ($300000/$300) = 1000 units
Variable cost per unit = ($240000/1000) = $240
Contribution per unit = Selling price per unit - Variable cost per unit = ($300-$240) = $60 per unit
Break-Even Point = (Fixed Cost/Contribution per unit) = ($60000/$60) =10000 units
Break-Even Point = (Fixed Cost/PV Ratio) = $60000/($60/300) = ($60000/0.2) = $300,000
Thus, ABC limited the need to sell 10000 units of electric fans to break even at the current cost structure.

Example 02:
The Following data relates to a firm for an accounting Period:

Sales $20,000/=
Variable Costs $12,000/=
Fixed Costs $6,000/=
Total Units Sold 10,000 units
Find:
1) PV Ratio
2) Contribution per Unit
3) BEP in Sales term
4) BEP in Quantity term
5) If The Fixed Cost increased by $7,000, what should be the Level of sales to reach BEP.

Answer
𝐒𝐚𝐥𝐞𝐬−𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐂𝐨𝐬𝐭 𝟐𝟎,𝟎𝟎𝟎−𝟏𝟐,𝟎𝟎𝟎 𝟖,𝟎𝟎𝟎
1) PV Ratio = = = = 0.40 = 40%
𝐒𝐚𝐥𝐞𝐬 𝟐𝟎,𝟎𝟎𝟎 𝟐𝟎,𝟎𝟎𝟎
𝐒𝐚𝐥𝐞𝐬−𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐂𝐨𝐬𝐭 𝟖,𝟎𝟎𝟎
2) Contribution per Unit = = = $ 0.80
𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐔𝐧𝐢𝐭 𝐒𝐨𝐥𝐝 𝟏𝟎,𝟎𝟎𝟎
Fixed Costs 6,000
3) BEP (In terms of Sale) = 𝑃 = = $15,000.00
⁄𝑉 𝑅𝑎𝑡𝑖𝑜 40%
Fixed Costs 6,000
4) BEP (In terms of Units) = = = 7,500 units
Contribution Per Unit 0.8
5) If Fixed cost increased by $7,000, then BEP in terms of Unit will be as follows
Fixed Costs 6,000+7,000 13,000
= = =16,250 units
Contribution Per Unit 0.8 0.8

Example 03:
From the following information Calculate (i) BEP, (ii) PV Ratio, (iii) Margin of Safety:
Sales revenue = $40,000/=
Variable Cost = $22,000/=
Fixed Cost = $8,000/=

Srabon Barua
MBA Business Analytics (2nd Semester)
 Answer
𝐒𝐚𝐥𝐞𝐬−𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐂𝐨𝐬𝐭 𝟒𝟎,𝟎𝟎𝟎−𝟐𝟐,𝟎𝟎𝟎 𝟏𝟖,𝟎𝟎𝟎
(i) PV Ratio = = = = 0.45 = 45%
𝐒𝐚𝐥𝐞𝐬 𝟒𝟎,𝟎𝟎𝟎 𝟒𝟎,𝟎𝟎𝟎
Fixed Costs 8,000
(ii) BEP (In terms of Sales Revenue) = = 𝑃 = = $17,778/=
⁄𝑉 𝑅𝑎𝑡𝑖𝑜 45%
(iii) Margin of Safety = Actual sales Revenue – Breakeven Sales Revenue
= 40,000 – 17778 = $22,222/=
22,222
(iv) Margin of Safety Percentage = X 100% = 55.5%
40,000

Example 04:

From the following information Calculate (i) PV Ratio, (ii) BEP (In terms of Sales Revenue),
(iii)Profit if the sales Rs. Rs.9,00,000, (iii) Estimated sales if the expected profit is Rs.90,000
Actual Sales for the period Rs.600,000, Variable Costs Rs.4,50,000, Fixed Costs Rs.90,000

Answer
𝐒𝐚𝐥𝐞𝐬−𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐂𝐨𝐬𝐭 𝟔,𝟎𝟎,𝟎𝟎𝟎−𝟒,𝟓𝟎,𝟎𝟎𝟎 𝟏,𝟓𝟎,𝟎𝟎𝟎
(i) PV Ratio = = = 𝟔,𝟎𝟎,𝟎𝟎𝟎 = 0.25 = 25%
𝐒𝐚𝐥𝐞𝐬 𝟔,𝟎𝟎,𝟎𝟎𝟎
Fixed Costs 90,000
(ii) BEP (In terms of Sales Revenue) = = 𝑃⁄ 𝑅𝑎𝑡𝑖𝑜 = = Rs.3,60,000
𝑉 25%
(iii) Estimated Profit = (Contribution – Fixed costs) = [(Sales x P/V Ratio) – Fixed
Costs] = {(9,00,000 x 0.25)-90,000} = Rs.1,35,000
𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭𝐬+𝐓𝐚𝐫𝐠𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
(iv) Estimated Sales to earn expected profit of Rs.90,000 = 𝐏𝐕 𝐑𝐚𝐭𝐢𝐨

𝟗𝟎,𝟎𝟎𝟎+𝟗𝟎,𝟎𝟎𝟎 𝟏,𝟖𝟎,𝟎𝟎𝟎
= = = Rs. 7,20,000
𝟐𝟓% 𝟐𝟓%

Example 05:
Fixed Costs = Rs. 25,000
Variable Costs = Rs.30/unit
Sales Price = Rs.30/unit
(i) Calculate BEP (Unit)
(ii) Sales Value to earn a profit of Rs.25,000
(iii) What additional units would be necessary to increase the profit by Rs.10,000
Answer

Fixed Costs 25,000

(i) Break Even Point (In Terms of Unit) = =
Contribution Per Unit 30−20

25,000
= = 2,500 units
10

Srabon Barua
MBA Business Analytics (2nd Semester)
 Fixed Costs+Target Profit
(ii) Target sales Quantity to earn a profit of Rs.25000 = Contribution Per Unit

25,000+25,000 50,000
= = = 5,000 Units
30−20 10

Fixed Costs+Target Profit

(iii) Target sales Quantity to earn a profit of Rs.10000 = Contribution Per Unit

25,000+25,000+10,000 60,000
= = = 6,000 Units
30−20 10

[Remember: PV Ratio should not be used to calculate BEP if SP, VC, are reported in Per unit terms]

Example 06:

A sole trader sells dresses at the price of $260. The Average Variable Costs (AVC) to produce one
dress are USD$120 per unit. The Fixed Costs (FC) for renting a workshop and paying interest on
the bank loan are USD$3,500. The sole trader wants to earn Profit of USD$5,600.

Question: How many dresses does she need to sell in order to earn this amount?

Profit = Total Contribution – Fixed Costs (TFC)

Fixed Costs (FC) = USD$3,500

Total Contribution = Contribution Per Unit x Price – Quantity
Total Contribution = [Price – Average Variable Cost (AVC)] x Quantity
Profit = [Price – Average Variable Cost (AVC)] x Quantity – Fixed Costs (TFC)
Fixed Costs+Target Profit 3,500+5,600
Target sales Quantity to earn a profit of Rs.25000 = Contribution Per Unit = 260−140 = 65 units

So, Target sales Quantity to earn a profit of $5,600 = 65

Answer: The sole trader needs to sell 65 dresses in order to earn Target Profit of USD$5,600.

Srabon Barua
MBA Business Analytics (2nd Semester)