Cost Volume Profit Analysis | Sahithyan's Notes

Cost-volume-profit analysis, also called breakeven analysis, is the study of the interrelationships between costs, volume, and profit at various levels of activity.

The breakeven point occurs when there is neither profit nor loss, so fixed costs equal contribution.

Contribution

\text{Contribution} = \text{Selling Price} - \text{Variable Cost}

Contribution per unit is the difference between selling price per unit and variable cost per unit.

Breakeven Point

The level of activity at which there is neither profit nor loss, where total revenue equals total cost.

\text{BEP (units)} = \frac{\text{Fixed Cost}}{\text{Contribution per Unit}}

\text{BEP (Sales Value)} = \frac{\text{Fixed Cost}}{\text{C/S Ratio}}

Contribution to Sales Ratio

Also called the profit/volume ratio. Measures how much contribution is earned from each unit of sales.

\text{C/S Ratio} = \frac{\text{Contribution}}{\text{Sales}} \times 100\%

Margin of Safety

The extent by which actual or projected sales exceed breakeven sales.

\text{Margin of Safety} = \text{Budgeted Sales} - \text{Breakeven Sales}

Limitations

Applies only to a single product or a single mix of a group of products.
A breakeven chart may be time consuming to prepare.
Assumes fixed costs are constant at all levels of output.
Assumes variable costs are the same per unit at all levels of output.
Assumes sales prices are constant at all levels of output.
Assumes production and sales are equal, ignoring inventory levels.
Ignores the uncertainty in the estimates of fixed costs and variable cost per unit.