What is 'CostVolume Profit Analysis'
Costvolume profit (CVP) analysis is based upon determining the breakeven point of cost and volume of goods and can be useful for managers making shortterm economic decisions. Costvolume profit analysis makes several assumptions in order to be relevant including that the sales price, fixed costs and variable cost per unit are constant. Running this analysis involves using several equations using price, cost and other variables and plotting them out on an economic graph.
BREAKING DOWN 'CostVolume Profit Analysis'
CVP analysis is a method of cost accounting that is concerned with the impact varying levels of sales and product costs will have on operating profit. CVP analysis is only reliable if costs are fixed within a specified production level. All units produced are assumed to be sold and all costs must be variable or fixed in a CVP analysis. Another assumption is all changes in expenses occur because of changes in activity level. Semivariable expenses must be split between expense classifications using the highlow method, scatter plot or statistical regression.
Basic CVP Formula
The basic CVP formula is the price per unit multiplied by the number of units sold equals the sum of total variable costs, total fixed costs and accounting profit. Total variable costs equal the number of units sold multiplied by the variable cost per unit.
Contribution Margin & Contribution Margin Ratio
CVP analysis also manages product contribution margin. Contribution margin is the difference between total sales and total variable costs. For a business to be profitable, the contribution margin must exceed total fixed costs. The contribution margin may also be calculated per unit. The unit contribution margin is simply the unit variable cost subtracted from the unit sales price. The contribution margin ratio is determined by dividing the contribution margin by total sales.
Breakeven Point of Sales
The contribution margin in used in the determination of the breakeven point of sales. By dividing the total fixed costs by the contribution margin ratio, the breakeven point of sales in terms of total dollars may be calculated. For example, a company with $100,000 of fixed costs and a contribution margin of 40% must earn revenue of $250,000 to breakeven. Profit may be added to the fixed costs to perform CVP analysis on a desired outcome. For example, if the previous company desired an accounting profit of $50,000, the total sales revenue is found by dividing $150,000 (the sum of fixed costs and desired profit) by the contribution margin of 40%. This example yields required sales revenue of $375,000.

Contribution Margin
A cost accounting concept that allows a company to determine ... 
Variable Cost Ratio
Variable costs expressed as a percentage of sales. The variable ... 
Operating Cost
Expenses associated with the maintenance and administration of ... 
Unit Cost
The cost incurred by a company to produce, store and sell one ... 
Marginal Profit
Marginal profit is the profit earned by a firm or individual ... 
Marginal Social Cost  MSC
The total cost to society as a whole for producing one further ...

Investing
Understanding CostVolume Profit Analysis
Business managers use costvolume profit analysis to gauge the profitability of their company’s products or services. 
Investing
Contribution Margin
Contribution margin is a cost accounting concept that allows a company to determine the profitability of individual products. 
Markets
Understanding Marginal Cost of Production
Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit. 
Investing
What's a BreakEven Analysis?
Most businesses have fixed costs such as rent and salaries, as well as costs for raw materials. Breakeven analysis shows how many sales it takes to pay off the costs of doing business, and “break ... 
Investing
A Look At Corporate Profit Margins
Take a deeper look at a company's profitability with the help of profit margin ratios. 
Investing
The Difference Between Gross and Net Profit Margin
To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue. 
Markets
Understanding Marginal Analysis
Marginal analysis is the process of comparing a oneunit incremental cost increase of an activity with a corresponding increase in benefits. 
Investing
What’s a Good Profit Margin for a New Business?
Surprisingly, the younger your company is, the better its numbers may look. 
Investing
The Operating Leverage And DOL
Operating leverage tells investors about the relationship between a company's fixed and variable costs. The higher a company's fixed costs in relation to its variable costs, the greater its operating ... 
Investing
What are Fixed Costs?
Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...

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