Cost-Volume-Profit (CVP) Analysis
Basic C-V-P Analysis
Cost-volume-profit relationships can be expressed through the use of graphs or formulas. Suppose a company sells its product for $20, the total fixed cost is $96,000, and the variable cost for each unit is $8.
The chart below shows the basic C-V-P relationship for such a company. Total revenues and total costs are plotted by locating two points for each element and drawing a straight line through the two points. The total revenue line begins at zero dollars (no sales) and extends through $240,000 at sales of 12,000 units ($20 x 12,000 units). The total cost line begins at 0 units and $96,000, the fixed cost if no units were sold. The total cost line ends at 12,000 units and $192,000 ($96,000 of fixed cost plus 12,000 x $8, or $96,000 variable cost). The point at which the two lines intersect, where total revenue equal total cost ($160,000), is called the breakeven point. In the chart below, this incur at 8,000 units.
Breakeven Analysis
Breakeven analysis utilizes the basic elements of cost-volume-profit relationships. As show above, the breakeven point is the point at which total revenues equal total costs. Breakeven point is the point at which a company begins to earn a profit. Breakeven analysis enables the controller, financial analyst, or planning professional to answer questions like:
- How did last year’s profit compare with the last time we experienced this level of capacity utilization (actual production levels relative to maximum possible production levels)?
- How much have our so-called fixed costs actually increased with volume over recent years?
- What level of profitability as a percent of sales and / or investment can we expect at “full” utilization of capacity?
- What confidence level can we have that a recent actual or forecast future change in profitability is really significant (i.e., more than just normal variability)
The breakeven point can be calculated by dividing the fixed cost by the contribution margin per unit. The contribution margin is calculated by subtracting the variable cost from the sale price.
| Symbols | Description | Units Produced and Sold | |||
|---|---|---|---|---|---|
| 1 | 250 | 500 | 750 | ||
| S | Sales Revenue ($90 per unit) | $90 | $22,500 | $45,000 | $67,500 |
| VC | Less Variable Costs ($50 per unit) | 50 | 12,500 | 25,000 | 37,500 |
| CM | Contribution Margin | $40 | $10,000 | $20,000 | $30,000 |
| FC | Less Fixed Costs | 20,000 | 20,000 | 20,000 | 20,000 |
| P | Profit (Loss) | ($19,960) | ($10,000) | $0 | $10,000 |