CVP Analysis

• CVP analysis is a management tool that helps managers in planning for profit by way of a systematic analysis of the interrelationship among costs, volume, and profit
• Contribution margin is the difference between sales and variable cost.
• Break-even point is a level of activity, at which total revenues equal total costs.
• BEP = FC/CM
• Indifference point is the level of volume at which two alternatives being analyzed would yield equal amount of total costs or profits.
• IP = FC1 - FC2/ VCu1 - VCu2
• Sales mix is the relative combination of quantities of sales of various products that make up the total sales of a company.
• Sales Mix = (CM/unit) x Sales Mix
• The margin of safety is the difference between actual or budgeted sales and break-even sales. It indicates the maximum amount by which sales could decline without incurring a loss.
• MOS = Sales - Breakeven Sales
• Degree of Operating Leverage measures how a percentage change in sales will affect company profits.
• DOL = CM/Profit before tax