This preview shows pages 1–2. Sign up to view the full content.
7
Cost Volume Profit Analysis
Costvolumeprofit (CVP) analysis focuses on the relationships of prices, costs, volume, and mix of
products. It is useful for determining the amount of units or total sales revenue the company must
earn at a particular level of profit desired. CVP analysis is based on the on the
profit equation
:
Sales Revenue  Variable costs  Fixed costs = Profit
SP (x) – VC (x) – FC = Profit
Where SP = sales price per unit
VC = variable cost per unit
FC = total fixed costs
x = number of units
In most situations, you will solve for x, the number of units. Note the format of the equation includes
the components of the variable costing income statement. Although some textbooks provide
specific formulas, the formulas are not very flexible. The profit equation approach is easier to
remember given that you already know the income statement format. The key is to remember that
selling price and variable costs are in units and fixed cost is a total. Total sales revenue is
determined after you solve for the number of units to be sold. If you buy 3 beers at an NFL football
game for $8 each, sales revenue for the vendor at the stadium will be 3 times $8, or $24.
Assumptions in CVP Analysis
When relying on analysis using CVP, we must remember four assumptions so we can understand
the limitations of the analysis: The assumptions are:
a.
Costs can be accurately separated into their variable and fixed components.
b.
Both unit variable costs and total fixed costs remain constant within the relevant range.
c.
Inventory levels are zero or do not change.
d.
Costs are linear.
Using the profit equation, you can solve for both of the following at any level of activity:
1) units to be sold
2) sales revenue
Breakeven point
The breakeven point is the point where sales revenue equals total cost and where profit is zero.
Replace profit with zero in the profit equation to create a breakeven profit formula:
SP (x) – VC (x) – FC = 0
By inserting the appropriate sales price per unit, variable cost, and fixed cost information, the
above equation can be solved for the breakeven point in units. Assume that a company sells one
product for $10 with a unit variable cost of $4 and a total fixed cost of $15,600. To determine
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 04/20/2011 for the course ACC 101 taught by Professor Xyz during the Spring '11 term at Ohio State.
 Spring '11
 xyz
 Revenue

Click to edit the document details