CVP Analysis

Cost Volume Profit relationship is the

relationship of the cost of
production and the volume of
production with the profit
Behavior of Expenses in relation
to CVP
 Types of costs
 Variable cost
 Fixed cost
Preparing a CVP Chart
Costs(Rs)

Total fixed costs

Total costs

Volume in Units
Preparing a CVP Chart
Sales
Costs(Rs)

Total fixed costs

Total costs

Break-even
Point

Volume in Units
 Cost-Volume-Profit Graph
Breakeven Total revenues
Rs10,00
Point line
0
25 units
Total costs
8,000 line

6,000 Operating
income
4,000

2,000 Operating
loss
0
0 10 20 30 40 50
Units Sold
 SENSITIVITY ANALYSIS:  

 Is the use of “what if” to examine the impact

of changes in the assumptions on operating
results

 Once the cost structure is modeled (variable and fixed

costs are estimated) managers can do sensitivity
analyses or “What If” Analyses.
 This analysis examines what will happen if a particular
action is taken. For example,
 what will happen if fixed costs rise
 variable costs decrease
 what will happen if selling price is decrease
Assumptions
 Cost Volume Profit analysis
assumes that:
 There is linear relationship between sales
revenue and variable costs
 All units produced in a period are sold. That
means, Production units = Sales units
 Over all activity levels:
 Selling price per unit remains constant
 Variable cost per unit remains constant
 Fixed costs remain constant
Assumptions
 CVP assumes that
 There will not be any change in type
of product being produced and sold in
a period.
 All costs can be clearly classified into
either fixed or variable costs.
Assumptions of CVP
Analysis
 Expenses can be classified as either
variable or fixed.
 CVP relationships are linear over a
wide range of production and sales.
 Sales prices, unit variable cost, and
total fixed expenses will not vary
within the relevant range.
Assumptions of CVP
Analysis
 Volume is the only cost driver.
 The relevant range of volume is
specified.
 Inventory levels will be unchanged.
 The sales mix remains unchanged
during the period.