Cost Volume Profit (CVP) Analysis Flashcards
(20 cards)
What is Cost-Volume-Profit (CVP) Analysis
CVP analysis is a managerial tool that examines the impact of:
- Costs
- Volume
- Selling price
- Profitability
What does CVP provide
CVP provides clarity on what level of sales is needed to:
- Break even
- Achieve a desired profit
- Assess the impact of cost/price changes
What are the core CVP concepts
Core CVP concepts are:
- Contribution Margin
- Contribution Margin Ratio (CMR)
What is contribution margin
Contribution margin is the amount that contributes towards covering fixed costs and profit
CM per unit =
CM per unit = Selling Price (SP) - Variable Cost (VC)
CMR =
CMR = CM per unit / Selling Price X 100
What is CMR used for
CMR is used for calculating breakeven revenue in terms
What is the breakeven point
The breakeven point (BEP) is where total revenue = total costs
What are the three methods for calculating breakeven
Three methods are:
- Graphical method
- Contribution margin method
- Equation method
BEP (units) =
BEP (units) = Fixed Costs / CM per unit
BEP (revenue) =
BEP (revenue) = Fixed Costs / CMR
SP X x =
SP X x = VC X x + FC + Profit
What assumptions is CVP analysis based on simplifying
CVP analysis is based on simplifying assumptions:
- Linear cost and revenue functions
- Clear distinction between fixed and variable costs
- Sales price, variable cost per unit, and fixed costs remain constant
- Single product or constant sales mix
- No inventory change
When is targeted profit analysis used
Target Profit Analysis is used if the firm wants to earn a specific profit
What is the contribution margin method for target sales (units)
Target Sales (units) = FC + Target Profit / CM per unit
What does the margin of safety(MOS) show
Margin of safety shows how much sales can fall before a loss occurs
MOS =
MOS = Actual Sales - Breakeven Sales
What is MOS useful for
MOS is useful for:
- Risk assessment
- Scenario analysis
- Managing uncertainty
