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CVP analysis examines the relationship between cost, volume, and profit, focusing on how changes in cost drivers impact profits. It is used for planning and decision-making regarding product types, pricing, marketing strategies, and facility acquisition, while assuming predictable and linear cost and revenue relationships. Key concepts include fixed and variable costs, contribution margin, and the breakeven point where total revenue equals total costs.

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Ashryle Salazar
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4 views

sasas

CVP analysis examines the relationship between cost, volume, and profit, focusing on how changes in cost drivers impact profits. It is used for planning and decision-making regarding product types, pricing, marketing strategies, and facility acquisition, while assuming predictable and linear cost and revenue relationships. Key concepts include fixed and variable costs, contribution margin, and the breakeven point where total revenue equals total costs.

Uploaded by

Ashryle Salazar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Keypoints:

WHAT IS CVP ANALYSIS? - direct relationship between profit and volume.


- preferred by managers.
- examination of relationship among cost, volume and - no unit sells = loss equal to fixed costs.
profit.
- focuses on changes in cost driver impact variable and 3. Total variable costs change directly w/cost driver, but
fixed costs and how it affects profit. variable cost per unit is constant over a relevant range of
- It assumes direct relationship. activity.
4. Total fixed costs are constant but fixed cost per unit
Purpose and Applications changes inversely with cost driver over a relevant range of
- used in planning and decision making. activity.
- to make decisions on choosing the: 5. Selling prices do not change as sales volume changes.
a. Type of product to produce or sell 6. Inventory levels are constant
b. Pricing policy and strategy to follow 7. Technology as well as productive efficiency is
c. Marketing strategy CONSTANT.
d. Type of productive facilities to acquire 8. For multiple products, SALES MIX is CONSTANT.
9. Time value of money is ignored.
Basic or Inherent Assumptions of CVP Analysis
CVP Income Statement = Contribution Margin Income
1. All costs are categorized as variable or fixed Statement.
2. COST and REVENUE relationships are PREDICTABLE
Quantity sold PER UNIT PER TOTAL %
and LINEAR over a relevant range of activity.
Sales xx xx 100%
Variable Cost (xx) (xx) (xx)
Contribution M. xx xx xx
Fixed Cost (xx) (xx)
IBT xx xx
Tax Expense (xx)
Net Income xx

Keypoints:

1. SALES PER UNIT = SELLING PRICE


SALES IN UNITS = SALES VOLUME/QUANTITY
SOLD
2. QUANTITY SOLD extends up to CONTRIBUTION
MARGIN, total amounts of sales, variable cost and
Keypoints: contribution margin can be computed by per unit amounts x
quantity sold.
- shows linearity of total cost and revenue over activity Note:
range, both lines slope upward to right. - CM indicates contribution of product to overall
- starting point of cost line is fixed costs. profit. (remaining amount of revenue to cover
- starting point of revenue is 0,0 (direct relationship of fixed expenses)
revenue and sales volume) 3. Change in Operating income = Change in contribution
- intersection = Breakeven point (no profit/loss) margin

BREAKEVEN POINT (BEP)

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