CVP analysis Flashcards
Breakeven Point
Breakeven Point is that point of activity where total sales and total costs are equal, where no profit nor loss is made
Sales = FC + VC
Breakeven graph: Total sales = total cost
X-axis = levels of activity
Y-axis = Sales & Cost in £
Above the graph - profit
Below the graph - loss
BE Formula
BE in units - FC / Contribution unit (SP - VC)
BE in revenue - BE units * SP
Margin of safety
Difference between BE sales and current level of sales
Formula for determining the sales needed to make a profit
TFC + Profit required / Contribution unit (SP - VC)
Justify questions
Use a graph and contribution income statement table
contribution income statement table:
1) Revenues (selling price * units sold)
2) Less Variable Costs (Variable costs * units sold)
= Contribution margin
3) Less FC
= Operating profit or loss
Limitations of Breakeven analysis
1) Only deals with one product, firms have many products
2) Doesn’t include economies of scales
3) Only includes FC and VC, some costs show mixed behaviors
4) Assumes FC is always constant, however this isn’t the case
Contribution
Shows the margin on each unit sold and shows the rate at which profits and losses are made.
Contribution = Sales Price - Variable cost
CS ratio aka Contribution/sales ratio
Shows the rate at which profit/losses were made.
CS ratio = Contribution / sales
BEP calculations for the
Revenue = FC / CS ratio
No of Units = FC / contribution
Margin of safety calculations
MOS = Current sales - BEP sales
Revenue = Net profit / CS ratio
No of Units = Net profit / contribution per unit
MOD - margin of danger just replace net profit with net loss
Profit required formula
Revenue - Profit required + FC / CS ratio
Units - Total contribution required / Contribution per unit
Limiting factor
A factor that limits production/ sales
