Scribd
Upload
4 views

CVP Analysis

Management accounting

Uploaded by

wannaseebutterfly01
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
4 views

CVP Analysis

Management accounting

Uploaded by

wannaseebutterfly01
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 11

Cost -volume -Profit Analysis

▪ Cost -volume -Profit Analysis is a profit planning


technique which is generally used by the manager to
study the impact of change in cost and volume of
sale on the profitability of the enterprise. The CVP
CVP Analysis show the probable effect of change in fixed
cost and variable cost, sale price ,quantity and mix on
the future profits of the business.
▪ At what minimum level of sales, the total cost is recovered and the
enterprise avoid the losses?

▪ How much sales is required to achieve the target amount of


profit?
CVP Analysis
▪ What shall be the effect of change in variable cost and fixed cost
helps in following on the profitability of the firm?
decision making ▪ How does the change in selling price impact the volume of sale
situation and the profit?
▪ How is the profitability impacted when the sale mix is changed ?
▪ Should the firm be shut down temporarily or oporations be
permanently discontinued .
▪ To appreciate the usefulness of the cost volume profit
analysis in taking right business decisions, it is
necessary to understand the important terms and
concepts used in the technique, these are:
important terms ▪ Marginal cost
and concepts used ▪ Contribution
in the technique ▪ Profit volume ratio
▪ Break even point
▪ Margin of safety
▪ Marginal cost may be defined as the change in the total
Marginal cost due to increase or decrease in production by one
unit .It means variable cost consider as marginal cost. it
Cost is the cost of one addition unit.
EXAMPLE
▪ Contribution is the surplus generated by the products
sold after the recovery of its variable cost. It is the
difference between sale and the marginal cost. It is also
called contribution marginal or gross margin. It is a
type of fund out of which fixed cost are met. In this way
CONTRIBUTION the difference of contribution and fixed cost is profit or
loss. Contribution is very useful in fixation of selling
price, calculation of break even point, choice of product
mix to maximize profit and determination of probability
of products and department .
▪ CONTRIBUTION = SALE – VARIABLE COST
▪ CONTRIBUTION = FIXED COST + PROFIT
Formula of = FIXED COST – LOSS
contribution (IN UNIT) = Selling price(p.u) – Variable cost (p.u)
▪ Profit volume ratio established the relationship of
contribution with the sale. P/V ratio shows the
proportion of contribution in the given sale. A higher
P/V P/V ratio shows high proportion of contribution in the
RATIO given sele and thus with the given fixed cost, the
amount of profit is higher. Therefore a higher P/V ratio
is an indicator of high profitability.
1. When the information is given in aggregate amount :
P/V ratio = Total Contribution/Total Sale ×100
Pv ratio may be 2. when the information is given in per unit :
computed in three = contribution per unit/ selling price per unit ×100
different ways 3. when the information is given for two time periods:
P/V ratio = change in contribution/ change in sale ×100

You might also like