CostVolumeProfit Analysis 
What is CVP Analysis?
 CVP (CostVolumeProfit) Analysis breaks down costs into
those
that are fixed and those that are variable and then uses this
information
for rational decision making.

Contribution Margin
1. How does a contribution marginbased income statement
organize costs,
and why?
 A contribution marginbased income statement organizes
costs as
variable
and fixed to aid in management decision making. Knowing how costs
behave, management can better budget the profitability of various
decisions.
This format also provides a better understanding of how volume changes
influences revenues, costs, and profit.
2. What is contribution margin per unit (CMU)? What does it
tell management?
 The product’s CMU is the difference between its sales price
and
variable
costs. This is an important concept for managers because it tells
them the amount of money each additional sale will contribute to
covering
fixed costs and providing a profit. It equals the change in
profit
resulting from one additional sale.
3. What is a contribution margin ratio? What does it tell
management?
 CM ratio is the difference between selling price and
variable costs
per unit (or revenues and total variable costs), expressed as a ratio
or
percentage of the selling price. Thus, a 40% contribution
margin
ratio means 40 cents of every sales dollar is contributed to fixed
costs
and profits. Or, each additional dollar of revenue creates
40¢
in extra profit

CVP Assumptions and Limitations
 accurately break down costs into fixed and variable elements
 fixed costs will remain fixed during the period affected by
the decision being made
 variable costs vary in a linear fashion with sales
 works best when limited to a specific situation or
department
 economic and other conditions are assumed to remain
relatively stable
 it is only a guide to decision making

The Profit Equation
==> the CVP Equation!
We use the profit equation to derive the CVP equations
 Profit = Revenues  Expenses
 now rewrite revenues as Sales price * volume
(i.e., number of units
sold)
 Profit = (SP * Vol)  Expenses
 now rewrite expenses as variable costs plus fixed
costs
 Profit = (SP * Vol)  (VC +
FC)
 now rewrite VC as VC per unit * volume
 Profit = (SP * Vol) 
[(VC/unit * Vol) + FC]
 distribute the minus sign and collect terms
 Profit = Vol*(SP  VC/unit)  FC
 notice that SP  VC/unit is the same thing as
contribution margin per unit
 Profit = Vol*(CM/unit)  FC
 solving the equation for volume we get

FC + Profit
Vol(units) = 
==>
this is the CVP formula!
CM/unit
CVP
Formulas

FC + Profit
Vol(units) = 
$CM/unit 
FC + Profit
Vol($) = 
CM% 
Note:
When profit = 0
this is a breakeven analysis
We can solve for either breakeven volume or breakeven revenues 


Graphical Representation

WhatIf Analysis
1. Describe “whatif” analysis.
 “Whatif” analysis changes a CVP equation variable and
seeks its effect
on volume, revenues, or profit. For example, a “whatif” scenario
might involve determining the extra profit from spending $10,000 on
advertising
if it increases sales by 10%.
2. What is the margin of safety? What does it tell
management?
 The difference between the sales forecast and the
breakeven point is
called
the margin of safety, which is usually expressed as a percentage of the
sales forecast. This is the percentage decline in sales that can occur
before the company reaches its breakeven point.
