1|Page

Chapter-3 Cost-Volume-Profit Analysis

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique used to study the
relationships between sales volume, costs (both fixed and variable), and a business's profit.
It is a powerful tool for short-term planning and decision-making, helping management
understand how changes in selling price, costs, or volume will affect the company's financial
results.
Key Components of CVP Analysis
CVP analysis focuses on the relationship of four primary components:
1. Cost: Expenses are separated into Fixed Costs (costs that don't change with production
volume, like rent) and Variable Costs (costs that change directly with production
volume, like raw materials).
2. Volume (or Activity): The total number of units produced and sold, or the amount of
service provided.
3. Profit: The difference between total sales revenue and total costs. The ultimate goal of
the analysis is to determine the volume needed to achieve a target profit.
4. Contribution Margin (CM): This is the amount of revenue remaining after deducting
variable costs. It represents the portion of sales revenue that contributes toward
covering fixed costs and generating a profit.
Contribution Margin = Sales Revenue - Total Variable Costs
Main Applications of CVP
CVP analysis helps managers answer critical business questions, such as:
1. Break-Even Point (BEP): What is the minimum sales volume (in units or dollars) the
company needs to sell to cover all its costs (Fixed + Variable) and achieve zero
profit/loss?
𝐹𝐶
𝐵𝐸𝑃 𝑖𝑛 𝑈𝑛𝑖𝑡 = 𝐶𝑀 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡

2. Target Profit Analysis: How many units must be sold, or how much sales revenue
must be generated, to achieve a specific amount of desired profit?
𝐹𝐶 + 𝑇𝑃
𝑇𝑎𝑟𝑔𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 =
𝐶𝑀 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
3. Pricing Decisions: How will a change in the product's selling price affect the break-
even point and overall profit?
4. Cost Management: How would a change in the company's cost structure (e.g.,
increasing fixed costs by buying a machine to reduce variable costs like labor) affect
profitability?
5. Margin of Safety: How much can sales drop before the company begins to incur a
loss? (The difference between current/expected sales and break-even sales).
 2|Page
Fixed Costs (FC)
Fixed costs are expenses that do not change in total regardless of increases or decreases in the
production volume or sales within a relevant range. These costs are often referred to as overhead and
are incurred even if a business produces nothing. They are time-related, typically paid monthly or
annually.
Total Fixed Cost = Constant Value
Year Annual Total Fixed Cost Number of units produced Fixed Cost per unit taka

2023 5,00,000 taka 5000 100 taka

2024 8,00,000 taka 10,000 80 taka
2025 10,00,000 taka 20,000 50 taka

Examples of Fixed Costs:

• Rent/Lease Payments: The cost of the factory, office, or store space is fixed by the lease
agreement, regardless of how many units are produced.
• Salaries: The compensation paid to permanent, non-production staff (like executives,
administrative staff, or full-time managers) that is set by contract and doesn't depend on output.
• Insurance Premiums: The cost of business insurance remains the same for the policy period.
• Depreciation: The calculated expense for the wearing down of equipment or buildings, often
determined by a fixed method.
• Property Taxes: Taxes on the business's property are assessed annually and do not change
with production levels.

Variable Costs (VC)

Variable costs are expenses that change directly and proportionally with the level of production or sales.
These costs are volume-related; if production increases, the total variable cost increases, and if
production decreases, the total variable cost decreases. If a business produces nothing, the total variable
cost is zero.
𝑻𝒐𝒕𝒂𝒍 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡 𝑿 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑
Number of units Produced Variable Cost per unit in taka Total Variable Cost in Taka

100 5000 5,00,000

200 5000 10,00,000
300 5000 15,00,000

Examples of Variable Costs:

• Raw Materials: The cost of materials directly used to make a product (e.g., flour for a baker,
lumber for a furniture maker). The more products you make, the more materials you need.
• Direct Labor Wages: Wages paid to employees who are directly involved in production, often
calculated by the hour or per unit produced.
• Packaging and Shipping: The cost of boxes, labels, and freight charges, which increase with
the number of products sold and shipped.
• Sales Commissions: Payments to salespeople that are a percentage of the sales they make.
• Production Utilities: Utility costs (like electricity for machinery) that rise as machines run
longer to produce more units.
 3|Page
Key Differences between Fixed costs and Variable costs:
Feature Fixed Costs (FC) Variable Costs (VC)

Remain constant in total, regardless Change in total directly with the level of
Behavior
of output. output.

Still incurred (e.g., rent must be

Output = Zero Total cost is zero.
paid).

Less controllable in the short term More easily controllable by adjusting

Controllability
(tied to contracts/leases). production volume or input sourcing.

Volume/Activity-related (paid per unit

Relation Time-related (paid over a period).
produced).

Decreases as production increases

Per Unit Cost Stays the same per unit.
(cost is spread out).

This graph illustrates the relationship between fixed costs, variable costs, and the total cost of
production. It shows how these costs change as the number of units produced increases. This
relationship is a fundamental concept in managerial accounting and cost-volume-profit (CVP)
analysis. CVP is used to analyze the effects of various costs on business profitability.
 4|Page
Break-Even Point
The Break-Even Point (BEP) is the precise moment when a company's total sales revenue
exactly equals its total costs (fixed costs + variable costs). At this point, the business is neither
making a profit nor incurring a loss.

Total sales revenue = Total costs (fixed costs + variable costs)

 5|Page
Basic BEP in Units Calculation
Problem-1
A company produces a single product. Its Fixed Costs (FC) are $150,000. The Selling Price
per Unit (SP) is $50, and the Variable Cost per Unit (VC) is $20. Calculate the Break-Even
Point in units.
Solution:
1. Calculate the Contribution Margin per Unit (CM):
CM = Sales Price per unit – Variable Cost per Unit = 50 - 20 = $30
2. Calculate BEP in Units:
𝐹𝐶
𝐵𝐸𝑃 𝑖𝑛 𝑈𝑛𝑖𝑡 =
𝐶𝑀 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
150,000
𝐵𝐸𝑃 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 =
30
= 5,000 units
BEP in Sales Dollars Calculation
Problem-2
A business has Fixed Costs (FC) of $60,000. The average Selling Price (SP) is $40 per unit,
and the average Variable Cost (VC) is $24 per unit. Calculate the Break-Even Point in total
sales dollars.
Solution
1. Calculate the Contribution Margin per Unit (CM):
CM = 40 - 24 = $16
2. Calculate the Contribution Margin Ratio (CMR):
𝐶𝑀 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
CMR = 𝑆𝑃 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
16
= 40
= 0.40
= 40%
3. Calculate BEP in Sales Dollars:
𝐹𝐶
BEP in Sales Dollars = 𝐶𝑀𝑅
60,000
= 0.40
= $150,000
BEP with a Target Profit
Problem-3
A manufacturer wants to achieve a Target Profit (TP) of $90,000. Its Fixed Costs (FC) are
$30,000. The product sells for $15 per unit, and the Variable Cost per Unit (VC) is $6. How
many units must the company sell to achieve the target profit?
Solution
Formula for Target Sales in Units:
𝐹𝐶 + 𝑇𝑃
𝑇𝑎𝑟𝑔𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 =
𝐶𝑀 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
 6|Page
1. Calculate the Contribution Margin per Unit (CM): CM = 15 - 6 = 9
2. Calculate Target Sales in Units:
𝐹𝐶 + 𝑇𝑃
𝑇𝑎𝑟𝑔𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 =
𝐶𝑀 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡

30,000+90,000
= 9
= 13,333.33 units

Finding Variable Cost per Unit from BEP Data

Problem-4
A small boutique knows its Fixed Costs (FC) are $45,000. It sells a product for $30 per unit.
The company has calculated its Break-Even Point (BEP) to be 3,000 units. What is the
Variable Cost per Unit (VC)?
Solution
1. Find the Contribution Margin (CM) per Unit:
𝐹𝐶
CM = 𝐵𝐸𝑃 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠

45,000
= 3,000

= $15
2. Find the Variable Cost (VC) per Unit:
VC = SP - CM
VC = 30 - 15 = 15

Finding Sales Needed to Cover a Loss

Problem-5
A service company is currently operating at a loss of $20,000 this month. Its Fixed Costs (FC)
are $100,000. The Contribution Margin Ratio (CMR) for its services is 25% (0.25). What
is the amount of total sales dollars needed just to reach the Break-Even Point from this position?
Solution
1. Calculate the BEP in Sales Dollars:
𝐹𝐶
BEP in Sales Dollars = 𝐶𝑀𝑅
1,00,000
= 0.25
= $4,00,000