Subject: Accounting for Managers
Lesson: CVP Analysis
Lesson Developer: Yasha Bothra
College/Dept: Bharati College,
University of Delhi
Institute of Lifelong Learning, University of Delhi
C-V-P Analysis
Lesson: CVP Analysis
Table of Contents:
1: Learning Outcomes
2: Introduction
3: Concept/Meaning of CVP Analysis
4: Techniques of C-V-P Analysis
4.1: Equation Method
4.2: Contribution Margin Analysis
4.3: Profit Volume Ratio
4.4: Break Even Analysis
5 : Break Even Point-Algebraic method
5.1: Cash Break-Even Point
5.2: Composite Break-Even Point
5.3: Cost Break -Even Point
6: Margin of Safety
7: Graphical Presentation of Break-Even Analysis
7.1 Angle of Incidence
8: Effect of Change in Cost Volume and Selling Price
8.1 Effect of Change in Cost on Profitability
8.1.1Effect of Change in Variable Cost
8.1.2 Effect of Change in Fixed Cost
8.2 Effect of Change in Sales Volume and Selling Price on Profitability
8.3 Effect of Change in Total Variable Cost and Total Sales Volume.
8.4 Composite Effect of Change In Total Variable Cost, Total Fixed Cost, Sales
Volume and Selling Price
9. Uses of Break Even Analysis
10. Limitations of Break Even Analysis
11. Limitations of C-V-P Analysis
Summary
Exercises
Glossary
References
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1. Learning Outcomes:
After you have read this lesson you should be able to:
•
•
•
•
•
•

•
understand the relationship between cost, volume and profit,
understand the concept, assumptions, uses and limitations of C-V-P analysis,
explain the effect of cost structures on firm‘s profitability,
identify the nexus between cost, revenue and profitability,
appreciate techniques used by managers for C-V-P Analysis,
comprehend the importance of C-V-P Analysis for decision making,
calculate the desired level of sales to earn desired profits,
determine the break-even level of sales.
2. Introduction:
1.
Hello friends,
My name is Ito. I want to start a business. I asked many of my
friends for some good business ideas. They have suggested to me
to start selling toys as this market is very flourishing. They have
told me to initially buy 10,000 toys at
10 per unit from a
wholesaler and take a shop at rent of 5000 per month in Karol
Bagh. I want to earn a profit of 10,000 in the first month .Can
you tell me how many units I need to sell?
Many people face problems like the one Ito is facing above at the time of starting the
business or even while continuing with the business. In fact managers in any kind of
business organization have to take decisions relating to quantity of goods to be produced,
selling price to be charged in the existing market conditions, what type of goods or which
good should be produced to get the desired profit and so on. Manager of business
organizations are always eager to know. What is appropriate product mix for their firm?
What is the best price to be charged from customers for achieving the desired objectives
and goals? What will happen to the firm‘s profitability if suppliers increase the price of raw
materials? Is it reasonable to increase sales volume by incurring more fixed cost? What will
happen if firm is not be in a position to increase selling price of the product and total cost of
production has increased, etc? Managers of various organizations have to take decisions
regarding selling a particular product at a particular selling price, or whether to buy a
product from Mr. A or Mr. B who is selling at a low price but in large quantity, or whether
they should start selling their products in foreign market or not and many more. Answer for
all such questions lies in understanding the technique of CVP Analysis.CVP analysis is a
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technique that helps managers to get answers of all their above questions. It tells us about
the relationship between cost, volume of production and profit of the firm.
3. Concept/Meaning of CVP Analysis:
Orjih (2001), has explained the concept of cost-volume-profit analysis as “specific way of
presenting and studying the inter-relationship between costs, volumes and profits.”
It is a costing technique that is used by managers to understand the relationship between
cost of a product, volume of quantity sold and profits from a given sale and also the effect
of change in one or more of these on each other.
CIMA London has defined CVP Analysis as, ―the study of the effects on future profits of
changes in fixed cost, variable cost, sales price, quantity and mix.‖
Studying CVP analysis is like studying relationship between fixed cost, variable cost, sales in
either quantitative terms or monetary terms and profit. In our study we will take cost and
sales function to be linear.
3.1. Assumptions of C-V-P Analysis
C-V—P analysis is based on certain assumptions. These suppositions have made the
analysis easier, but it has also contributed to its limitations as well. The assumptions in C-VP- analysis are:
1. One can segregate total cost into fixed cost and variable cost.
It is assumed that one can easily bifurcate costs into fixed and variable. That is, we know
which costs change with change in the level of production and which costs do not change
with change in level of production.
2. Fixed costs stay fixed.
Fixed cost is assumed to remain constant for all level of production i.e. it does not change
with the change in volume of production. C-V-P Analysis is used for short term decision
making problems. For example, a particular factory is capable of producing 1000 units of a
good. Then, it doesn‘t matter whether the producer has produced 600 units, 700 units or
zero unit. The producer has to pay the same amount of rent in all cases. Whereas in reality
fixed cost does increase after a certain level of production. For instance if he wants to
produce more than 1000 units; he has to take up another factory by paying more rent.
3. There is no change in per unit variable cost.
Variable costs are the costs that change with change in the level of production. It is
assumed here that per unit variable cost remains constant irrespective of the level of
production. For example one can understand it like this- it doesn‘t matter how many units of
raw material is bought by a firm, the price per unit of raw material will be the same.
4. Selling price per unit is constant.
It is assumed that no quantity discounts are available to the buyer. All units bought bear
the same selling price irrespective of the quantity of goods sold. Thus, there is a direct
relationship between quantity of goods sold and total sales revenue earned by a firm.
5. Amount of goods sold is equivalent to the amount of goods produced.
It is assumed that there is no opening or closing stock. All the goods produced are sold in
the market.
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6. While performing multiproduct C-V-P, the mix of goods sold remain even.
It is assumed that if more than one commodity is offered for sale in the market, the proportion of
all the goods in the total sales will remain the same. The proportion of the various products in total
sales made by the firm will remain constant. For example, a bakery owner sells 2 pastries for every
3 packets of chips. The sales mix of this bakery in terms of units of product sold is 2 to 3 i.e. in
standard form it can be written as 2:3.In other words we assume that out of every 5 units sold by
this bakery,2 will be pastries and 3 will be packets of chips.
4. Techniques of C-V-P Analysis
All managers view C-V-P Analysis as a tool for decision making and control. It helps
calculate the level of sales at which the firm will be able to cover all its cost. There are two
techniques of CVP analysis. These are:
Figure 1: Techniques of CVP Analysis
Techniques
Equation
Method
Contribution
Margin
Analysis
Profit
Volume
Ratio
Break
Even
Analysis
4.1 Equation Method
In this method the following equation is used for problem solving:
Sales Revenue = Total Variable Cost + Total Fixed Cost + Profit
In any company, profit is equal to the amount of money left after covering total cost i.e.
Variable and fixed costs from total sales revenue. That is why in the above equation total
sales revenue is kept equal to the sum of total variable cost, total fixed cost and profit.
In case a firm is earning no profit and neither incurring any loss then total sales revenue will
be equal to the total variable cost and total fixed cost.
Sales Revenue = Total variable cost + Total fixed cost
This amount of sales revenue is also called as breakeven level of sales revenue as the firm
is earning neither profit nor incurring any loss.
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Example 1:
Suppose Ito is able to sell 2000 units of a good at Rs. 10 each .
Calculate profit when variable cost is Rs. 5000 and fixed cost is Rs.6000.
Solution 1:
Sales = Variable Cost +Fixed Cost + Profit
2000 X Rs.10 = Rs.5000 + Rs.6000 + Profit
Rs.20,000 = Rs.11000 + Profit
Rs.20,000 - Rs.11000 = Profit
Rs.9000 = Profit
SALES
Less: VARIABLE COST
CONTRIBUTION
Less: FIXED COST
PROFIT
XXXX
XXXX
XXXX
XXXX
XXXX
4.2 Contribution Margin Analysis
Contribution can be defined as the difference between total sales and total variable cost. It
tells us what portion of sales revenue is left to cater the fixed cost.
Contribution = Total Sales Revenue - Total Variable Cost
Total Sales Revenue is the amount of money received by selling of goods or services by a
firm. In other words, it can be calculated by multiplying the quantity of goods sold with the
selling price per unit. We can also refer it as ‗sales‘.
or Sales = Q X SP,
Where, Q = Quantity Sold
And
SP = Selling Price per unit
Total variable cost as explained above is the cost which changes with the change in
number of units produced or level of production. It is calculated by multiplying the number
of units produced with the amount of variable cost per unit. Variable cost per unit is the
sum of cost of raw material per unit, per unit cost of direct labour and other per unit
variable cost (if any).
or Variable Cost = Q X V
Where, Q = Quantity sold
And
V = Variable Cost per unit
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From the above table, it is clear that
Contribution - Fixed cost =Profit
OR
Contribution = Fixed cost +Profit
Thus we can say that,
Total Sales Revenue - Total Variable Cost = Fixed Cost +Profit
Figure 2: Contribution Profit Relationship
So… I must earn
enough contribution
to cover fixed cost &
make some profit.
Example 2: Calculate contribution from the following data:
Sales Rs.10,000 and Variable Cost Rs.5,000 Fixed Cost Rs.6000 and Profit Rs.10,000
Quantity sold is 5000 units, selling price is Rs.5 per unit and Variable Cost is Rs. 20,000
Solution 2:
Contribution
Contribution
= Sales – Variable Cost,
=Rs.10,000-Rs.5000
=Rs.5000
= Fixed cost + Profit
=Rs.6,000-Rs.10,000
=Rs.16,000
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Contribution
= Sales – Variable Cost
=Rs. (5,000 X 5)- Rs.20,000
=Rs.5,000
Contribution (per unit) = Contribution
Number of Units
=Rs.5,000/5,000
=Rs.1
Alternatively,
Contribution (per unit) = Selling Price Per Unit – Variable Cost Per Unit
=Rs.5-(Rs.20,000/5000)
=Rs.1
4.3 Profit Volume Ratio
Profit volume ratio or P/V Ratio is the ratio of contribution to sales. It tells us what
percentage of sales revenue is the contribution, if considered in percentage form. It is useful
in estimating the relationship between profit and sales of the firm. A high P/V ratio indicates
that a larger portion of sales revenue forms part of the profit for the firm. It is one of the
greatest tools available to managers to analyse the relationship between cost volume and
profit with regard to the product or a service. Similarly, a low P/V ratio means a lesser
portion of sales revenue becomes firm‘s profit or a large portion of sales revenue covers the
cost of the firm. One can take it as a large portion of sales is covering variable cost and thus
leaving only a small portion to cover fixed cost and leaves a less profit.
P/V Ratio
=
=
Contribution
Sales
Total Sales Revenue - Total Variable Cost
Sales
P/V Ratio can also be computed as:
=
=
Fixed Cost +Profit
Sales
Change in Contribution
Change in Sales
If due to some reason there is an increase in contribution then there is bound to
be an equal amount of increase in profit as fixed cost remains same or constant.
Therefore,
P/V Ratio
=
Change in Profit
Change in Sales
Uses of P/V Ratio
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P/V Ratio is of great use to decision makers in a firm. It helps them in following ways:
Estimating Profitability
We are now familiar that P/V Ratio shows ratio of contribution to sales. As it is shown in the
percentage terms, we can know if sales are of Rs.100 then the amount of contribution can
be easily computed. For example if P/V ratio is 60%, then for a sale of Rs.100 the
contribution is Rs.60. Thus, we can say that P/V Ratio helps in determining profitability by
selling a product or different products.
Comparison of Profitability
P/V Ratio can be used to compare the profit opportunities from sales of different products,
services or by adopting different methods. A manager may be interested in knowing what to
do if same product can be made by buying raw material from different sources at different
prices and can be sold at different prices. In that case P/V Ratio can be helpful.
Calculation of breakeven point, sales required to earn desired profit, margin of
safety
P/V ratio is used for calculating breakeven point, sales required to earn desired profit,
margin of safety etc. that will be discussed in the next section.
Value Addition 1: Important Tip
P/V Ratio
It must be noted that P/V Ratio is not taken in isolation by managers in decision making.
They are also guided by other tools and techniques also.
Improvement in P/V Ratio
P/V Ratio tells us the percentage of benefit in selling price if only variable cost is taken out
but not fixed cost. Therefore, an increase in P/V Ratio without any increase in fixed cost will
indicate an increase in total profit of the firm. Thus, we can say that the more the spread
between sales and variable cost the better will be the P/V Ratio. And higher the P/V Ratio,
better it is for the firm. Thus, manager can improve P/V Ratio:
i.
By increasing the selling price of the product.
ii.
By reducing the variable cost of the product.
iii.
By making adjustments in the sales mix i.e. increasing the proportion of product having
higher P/V ratio and reducing the one with lower P/V Ratio.
Figure 3: Ways to Improve P/V Ratio
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Increase
Selling
Price
How to
Improve
P/V Ratio?
Reduce
Variable
Cost
Adjust
Sales
Mix
Limitations of P/V Ratio
P/V Ratio does not consider the effect of change in the fixed cost. Thus, a decision only on
the basis of P/V Ratio can be misleading. It is possible that a particular product might have
a high contribution margin but a very low, zero or negative profit due to a high fixed cost.
For example, a firm having 30% P/V ratio and Rs.10,000 as fixed cost might appear
profitable by just looking at these two figures. But if we are given that sales are Rs.20,000
then contribution will be Rs.6,000(30% of 20,000).And therefore there will be loss of Rs.4000
(Rs.6000-Rs.10,000).Thus, one has to be very careful before taking any decision on the basis
of P/V ratio only.
Value Addition 2: Did You Know?
P/V Ratio
P/V Ratio is also called contribution margin ratio or contribution to sales ratio.
Example 3: Calculate P/V Ratio from the following data:
Sales Rs.10,000 and Variable Cost Rs.5,000
Quantity sold is 5000 units, selling price be Rs.5 per unit and Variable Cost be Rs.20,000
Solution3:
Contribution
= Sales – Variable Cost
=Rs.10,000-Rs.5000
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P/V Ratio
Contribution
P/V Ratio
=Rs.5000
=Contribution/Sales
=Rs.5,000-Rs.10,000
=50%
= Sales – Variable Cost
=Rs. (5,000 X 5)- Rs.20,000
=Rs.5,000
=Contribution/Sales
=Rs.5,000/Rs.25,000
=20%
4.4. Break-Even Analysis
Break-even analysis is one of the most widely used techniques in management decision
making. In this technique, total cost i.e. variable plus fixed cost is compared with sales
revenue to determine the sales level (quantity or value) at which business neither earns
profit nor incurs losses.
Importance of break-even analysis:
Knowledge of break-even point is a very useful to managers. It helps them in following
ways:
i.
It helps in estimating the optimum level of output for earning decided profit. With
the information about break-even point of sales, one can estimate what level of
additional sales is required to earn required profit.
ii.
It helps in estimating selling price of a product. As we all know break-even point is
the point at which cost and sales are equal so if we get total cost and divide it by
total units to be sold we will get the price at which cost and revenue will be same.
Now after knowing this price, firm can choose its own price at which goods will be
sold in the market.
iii.
It tells about the point after which there will be profit and firm would be able pay
dividends to its shareholders. It is the point after which firm starts earning profit and
that‘s why dividend will be paid only after reaching this point.
iv.
To analyse the impact of changes in price and cost on firm‘s profitability we can
make use of break even analysis.
4.4.1 Methods of Break-Even Analysis
Break-even analysis as discussed above is helpful in ascertaining the level of sales at which
firm breaks even i.e. it neither makes loss nor earns profit. This break-even point of sales is
also helpful in further more calculations like determining the margin of safety. But first we
should understand how to calculate the break-even point. There are two methods for
calculating the break-even point. These are:
1) Algebraic method
2) Graphical method
Figure 4: Methods of Break-Even Analysis
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There are two methods of doing break-even analysis.
GRAPHICAL
METHOD
ALGEBRAIC
METHOD
5.
Break-Even Point- Algebraic Method
It is a point that tells us how many units of a product we need to sell or how much sales
revenue we actually need to earn before we start making profit. It can be understood as a
point of indifference ie. a point at which there will be no losses and no profit.
In simple words, break-even can be understood as a situation of no profit and no loss.
Therefore, we can say that it is that point at which contribution is equal to fixed cost. In
other words, contribution is able to cover up only fixed cost. At the level of break -even
point, revenue from sales is able to cover only variable cost and fixed cost.
Let us understand:
We know that:
Sales = Q X SP
Variable Cost = Q X V
C = Contribution per Unit
So, Total Contribution = Q X SP - Q X V
= Q X (SP –V)
=QXC
At break -even point,
Total Contribution = Fixed Cost
i.e.,
Q X C = Fixed Cost
Q=
……
Fixed Cost
Contribution per Unit
Thus we understand that, break-even quantity or break- even point in units
Q=
Fixed Cost
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Contribution per Unit
Now let us multiply this equation by selling price per unit i.e. SP on both sides
We get,
Q=
Fixed Cost
Contribution per Unit
X SP
Remember,
P/V Ratio = C/SP
1
= SP/C
P/V Ratio
Q=
Fixed Cost
P/V Ratio
Thus, we understand that, break-even sales volume or break- even point in
Rupees
= Fixed Cost
P/V Ratio
Break-even point has to be calculated in various situations. Therefore, we will study it under
different situations.
Figure 5: Types of Break-Even Point
Break-Even Point
Cash Break-even Point
Composite Break-even Point
Cost Break-even Point
5.1 Cash Break-Even Point
Till now, we have seen that break-even point is the point at which sales are able to cover
fixed as well as variable cost. However, we haven‘t considered that fixed cost also has a non
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cash element by various names such as depreciation and amortization of expenses for which
no cash is needed in the short run. Managers may be interested in knowing the amount of
sales that should be achieved in the short run to meet the expenses of variable cost and the
fixed cost that has to be paid in cash. He is actually interested in calculating cash breakeven point.
Cash Break-even Point in units
=
Cash Break- even Point in Rupees
=
……
……
Cash Fixed Cost
(Contribution per unit)
Cash Fixed Cost
P/V Ratio
5.2 Composite Break-Even Point
If a firm manufactures two or more products then it may be interested in knowing a single
breakeven point rather than individual break even points. For this purpose they have to
calculate a composite breakeven point.
Composite Break- even Point
……
Composite P/V Ratio
=
Total Fixed Cost
Composite P/V Ratio
= (Total Contribution/Total Sales)
5.3 Cost Break-Even Point
If a firm is operating on two plants then it may be interested in knowing the point or level of
operation at which cost of both the plants are identical. For this purpose they have to
calculate cost break-even point.
Cost Break- even Point
……
=
Difference in Fixed Cost
DDDD Difference in Variable Cost per Unit
Interactive 1
Value Addition 3: Did You Know?
Break-Even Point
There can be only one break-even point. There is only one quantity at which costs equals
revenue.
Example 4: Anandita Ltd. has a contribution of Rs. 78 per unit. Its fixed cost is
Rs.468000.Find the break even sales level for the firm.
Solution:
Break-even Sales Level = 468000/78
= 6000 units
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Example 5: Anandita Ltd.has contribution of Rs. 78 per unit. Its fixed cost is Rs.468000.Out
of this Rs.9360 is depreciation. Find the cash breakeven point for the firm.
Solution:
Break-even Sales Level = (468000-9360)/78
= 5880 units
Example 6: Anandita Ltd. provides you with following data:
Fixed cost
Rs.10,00,000
Sales
Good X:10,000 units @Rs.5 each
Good Y:20,000 units @Rs.8 each
Contribution per unit
Good X: Rs.2 Good Y: Rs. 6
Calculate composite breakeven point.
Solution 6:
Sales
Sales Ratio = 5:16
Combined p/v ratio
Good X
Good Y
10,000X5=50,000
20,000 X 8 = 1,60,000
=
(5/21X2) + (16/21X6)
(5/21X5) + (16/21X8)
= 0.692
Composite break even point = Total Fixed Expenses/Composite PV Ratio
= 10,00,000/.692
= Rs.14,45,086.70, or 14,45,087
Break even sales for the two products
Good X = 14,45,087 X 5/21 = Rs.3,44,068(approx)
Good Y = 14,45,087 X 16/21 = Rs.11,01,019(approx)
5.4 Desired Sales to Earn Desired Profit
By now we know how to find break-even sales. As you know every entrepreneur is working
hard to earn a reasonable amount of profit that will satisfy his needs. Hence, we are
interested in knowing the level of sales to earn desired profit. In short, we are interested in
knowing the sales level that will cover variable cost, fixed cost and leave some profit
margin.
It can be as follows:
Sales to earn desired profit (in units) = Fixed Cost + Desired Profit
Contribution
Sales to earn desired profit (in Rs.)
= Fixed Cost + Desired Profit
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P/V Ratio
Example 6: A firm has fixed cost of Rs. 20,000 and has contribution per unit of Rs. 10. I t
wants to earn profit of Rs. 6000.what should be the desired sales level if selling price per
unit is Rs. 5.
Solution: Desired Sales level = (20,000+6,000)/10
= 2600 units
6. Margin of Safety
The difference between total sales and actual sales is known as margin of safety. These are
those additional sales after break-even level that have helped firm to earn profit. Most firms
want to know about the margin of safety to take various decisions such as:
1) Can we reduce our quantity sold by some level without incurring any loss?
2) Are budgeted sales good enough?
Margin of safety is actually a measure of risk. It tells us about the amount of drop in sales
that a firm can tolerate. A large margin of safety means that business can still make profit
even if there is a serious fall in its sales.
Margin of Safety = Actual or Budgeted Sales – Break Even Sales
Margin of safety can be calculated as ratio to total sales
Thus ,Margin of Safety Ratio = Actual or Budgeted Sales – Break Even Sales
Actual or Budgeted sales
Value Addition 4: Did You Know?
Margin of Safety
Margin of Safety is the difference between actual sales and sales at break-even point. So, managers
know about the fall in sales that can be tolerated by the firm. Low margin of safety means fall in
sales can drastically impact the firm‘s profitability. It gives competitive strength.
6.1 Relationship between Margin of Safety and Profit
Margin of safety is that amount of sales after break-even point that contributes towards
firm‘s profitability. It is that portion of total sales due to which profit is above zero. Thus, if
we multiply margin of safety with P/V ratio, we can actually calculate profit.
Profit = Margin of safety X P/V Ratio
Or
P = M/S X P/V Ratio
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Example 7: Use the following information to calculate margin of safety:
Selling Price per Unit
Rs. 10
Variable Cost per Unit
Rs. 6
Total Fixed Cost
20,000
Rs.
Budgeted Sales
units
10,000
Solution 7:
Break-even Sales (in units) = 20,000/4
=5000 units
Margin of Safety (in units)
= 10,000-5,000
=5000 units
Example 8: From the following information calculate net profit and break-even point:
Margin of Safety: 40%
P/V Ratio
: 60%
Current Sales
: Rs.2,00,000
Solution 8:
Current Sales
Rs.2,00,000
Less: Margin of Safety (40%)
Rs.80,000
Break-even Point
Rs.1,20,000
Profit = M/S X P/V Ratio
= Rs.80,000 x 60%
= Rs.48000
Value Addition 5: Did You Know?
Margin of Safety
How margin of safety can be increased?
 By raising the selling price.
 By increasing the volume of sales.
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 By reducing the fixed cost.
 By reducing variable cost
 Increasing the proportion of that product in the total sales mix which has
higher P/V ratio
Interactive 2
7. Graphical Presentation of Break-Even Analysis
Break-even point can be ascertained with the help of a break-even chart. According to
London Management Centre “A breakeven chart is a strategic tool used to plot the financial
revenue of a business unit against time or sales to determine the point when sales output is
equal to revenue generated. This is recognised as the breakeven point.”
It is an analysis which makes use of fixed cost and variable cost to calculate total cost. Then
this total cost is compared with sales. Graphically total cost line and sales or sales revenue
line meet at a point. This is break-even point.
Let us understand this concept by a break-even graph. We will do everything step by step.
We will take level of production in units on x-axis and sales revenue or cost and profit on yaxis
1. Determine the Total Fixed Cost
These are the costs that do not change with change in volume of production. Thus, fixed
cost line is a line parallel to x-axis showing that it remains constant for any level of
production.
Figure 6: Fixed Cost
Rs.
Fixed cost
Units
In the above figure, fixed cost line is parallel to the x-axis. It indicates that whatever be the
number of units produced fixed cost will remain same.
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2. Determine the Total Variable Cost:
Variable cost as the name implies varies with the level of production. It is directly related to
number of units produced. As the level of production increases variable cost also increases
and vice versa. When there is no production variable cost is zero and as the production
increases variable cost also increases accordingly.
Figure 7: Variable Cost
Rs.
Variable cost
Fixed cost
Units
In the above figure, the red line represents variable cost. It starts from origin showing zero
cost for zero units produced and then sloping upward to show increase in cost with increase
in units produced.
3. Determine Total Cost:
The next step is to plot the total cost line. We all know that in any firm
Fixed
Cost
Variable
Cost
Total
Cost
At zero level of production the only cost burden to any firm is of fixed cost because there is
no variable cost at this level. Therefore the total cost line starts from the intercept of fixed
cost level and then the total cost line keeps increasing. As we know that the variable cost
increases with increase in output and thus the total cost (sum of fixed cost and variable
cost) also increases continuously.
Figure 8: Fixed Cost, Variable cost and Total costs
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Total cost
Rs.
Variable cost
Gap between total cost and
variable cost is fixed cost
Fixed cost
Units
In the above figure, total cost line is parallel to the variable cost line. The distance between
the total cost line and variable cost line is due to fixed cost. Total cost line is shown in
green colour in the above diagram.
4. Determine Total Sales:
Total sales can be determined by multiplying selling price per unit with the quantity sold. It
is also upward sloping as sales revenue increases with increase in number of units sold.
Figure 9: Margin of safety and Break-Even Point
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C-V-P Analysis
Total sales
Rs
Total cost
Break even point
Margin of Safety
Q1
Q2
Units
Here
Q1 is the quantity at which total cost = total sales
Q2 is the actual sales of the firm
Total sales line is represented by the red line in the above diagram. It starts from origin and
goes on increasing as the number of units sold increases. The point at which total sales line
intersects the total cost line, it is break-even point. Margin of safety is the area between
break even sales level and actual sales.
7.1 Angle of Incidence
It is formed by the intersection of total cost line with the total sales line at the break-even
point. It shows the rate of increase in profit earned after reaching the break-even level.
Greater the angle of incidence, higher will be the rate of earnings and vice versa.
Figure 10: Angle of Incidence
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C-V-P Analysis
In the figure above, the angle shown by pink colour is the angle of incidence. Profit area is
given by deducting area under total cost line from area under total sales line. Loss area is
given by deducting area under total sales line from area under total cost line.
Value Addition 6: Did You Know?
Angle of Incidence
‘Greater the angle of incidence higher will be the profit’ Why?
Angle between any two lines will be greater if there is more distance between two lines.
(Just think of gap between the arms of 30 degree angle and 60 degree angle.)
So, greater angle of incidence means there is more gap between the line of sales revenue
and total cost line and more gap means more profit.
Value Addition7: Activity
Angle of Incidence
Draw two angles of different measures and look at the area between the arms of shorter
and larger angle. It will help you to understand why more profit is earned when angle of
incidence is larger.
Interactive 3
8. Effect of Change in Cost, Volume and Selling Price on
Profitability
By now, we have understood the technique of C-V-P analysis and various
formulaes that establish the relationship between cost, volume and profit.
Now , let us consider the effect of change in cost, volume or profit on each
other and how it effects the decision of managers.
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C-V-P Analysis
8.1
Effect of Change in Cost on Profitability
We know that a firm has two types of costs namely variable cost and fixed cost. Change in
any of the following will lead to change in contribution and thereby a change in profit of the
firm. In other words, an increase in cost will reduce contribution margin and thus results in
a lower profit and a decrease in cost will lead to an increase in contribution and thus a
higher profit. This is represented in figure below:
8.1.1. Effect of Change in Variable Cost
Here, by increase in variable cost we mean an increase in per unit cost of production. This
increase in per unit cost will lead to an increase in total variable cost. It implies that now a
larger portion of sales revenue will be required to cover total variable cost which will
ultimately leave us with a lower contribution margin. This lower contribution margin will lead
to lower funds available to cover fixed cost and, therefore, a lower profit.
Figure 11: Impact of a Change in Variable Cost
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C-V-P Analysis
Increase(decrease) in Cost
per Unit
Increase(decrease) in
Total Variable Cost
Decrease(Increase) in
Contribution Margin
Example 9: Karnariko limited is selling 2000 units of sweet boxes at the selling price of
Rs.56 each.
These boxes are made up of cardboards that are bought from Boardex Ltd. at a price of
Rs.20 for a piece of cardboard which is sufficient to make one box only. Fixed cost for
Karnariko Ltd is Rs.10,000. It is expected that price of a piece of cardboard will increase by
10%.Show its effect on firm‘s profitability.
Solution 9:
Income statement before increase in cost of cardboard
(Rs.)
Sales (2000 X 56)
1,12,000
Less: Variable Cost (2000 X 20)
40,000
Contribution
72,000
Less: Fixed cost
10,000
Profit
62,000
Income statement after a 10% increase in per unit cost of cardboard
(Rs.)
Sales (2000 X 56)
1,12,000
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Less: Variable Cost (2000 X 22)
44,000
Contribution
68,000
Less: Fixed cost
10,000
Profit
58,000
Thus, we have seen that an increase in variable cost by 10% has resulted in a lower
contribution margin by 5.6% (approx.) and hence a decrease in profit by 6.5%(approx.).
8.1.2 Effect of Change in Fixed Cost
Fixed cost as everyone knows is a period cost. It does not change with change in number of
units produced. Therefore, change in fixed cost will have no effect on contribution margin
from sales but it will affect the overall profit earned by the firm. Let us understand it by an
example.
Example 10: Amana Ltd is engaged in producing candle stands. The cost of producing a
candle stand is as follows:
Raw Material : Rs.48
Direct Labour : Rs.32
It is also paying Rs.5000 as rent of the factory. It is expected that landlord will increase the
rent to Rs.7000 in the next year. Show how it will affect the profitability of firm if it is selling
1000 candle stands at a price of 100 each. No change in the selling price and number of
stands sold is expected in the next year.
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Solution 10:
Income statement before increase in rent of factory
Sales (1000 X 100)
Less: Variable Cost
Raw material(1000 x 48) =48000
Direct labour(1000 x 32) =32000
Contribution
Less: Fixed cost
Profit
Rs.1,00,000
Rs.80,000
Rs.20,000
Rs.5,000
Rs.15,000
Income statement after an increase in the rent of factory
Sales (1000 X 100)
Less: Variable Cost
Raw material(1000 x 48) =48000
Direct labour(1000 x 32) =32000
Contribution
Less: Fixed cost
Profit
Rs.1,00,000
Rs.80,000
Rs.20,000
Rs.12,000
Rs.8,000
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Thus, an increase in fixed cost by 500 has led to a decrease in profit by Rs.500.
8.2. Effect of Change in Sales
Profitability
Volume and
Selling
Price on
Sales volume refers to the total number of units of a good or services sold in the market.
Every firm sets a target of sales volume to be achieved in a particular time period. The more
the number of units of a good or services sold, greater will be the sales revenue and thus,
more contribution and as a result of this there will be more profit.
Similarly, a change in selling price will affect the profitability. An increase or decrease in
selling price will increase or decrease the total sales revenue which will increase the
contribution margin and ultimately profit. Thus, a decrease in selling price will decrease the
profit .
Example 11: Expertese Ltd. is selling 2000 units of water guns at the selling price of Rs.50
each.
These water guns have a variable cost of Rs.20 each. Fixed cost is Rs.10,000. How much will
be the profit if:
1.4000 units are sold?
2.Selling price per unit is Rs.60?
Solution 11:
1. When 4000 units are sold
When 2000 units
were sold
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When 4000 units
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C-V-P Analysis
Sales
Rs.1,00,000
Less: Variable Cost
Contribution
Less: Fixed cost
Profit
Rs.2,00,000
Rs.40,000
Rs.80,000
Rs.60,000
Rs.1,20,000
Rs.10,000
Rs.10,000
Rs.50,000
Rs.1,10,000
It is clear that due to increase in sales volume by 2000 units profits has increased from
Rs.50,000 to Rs.1,10,000.
2. Selling price per unit is Rs.60
Selling price is
Rs.50 per unit
Sales (2000 units being sold)
Less: Variable Cost
Contribution
Less: Fixed cost
Profit
Selling price is
Rs.60 per unit
Rs.1,00,000
Rs.1,20,000
Rs.40,000
Rs.40,000
Rs.60,000
Rs.80,000
Rs.10,000
Rs.10,000
Rs.50,000
Rs.90,000
It is clear that due to an increase in selling price by Rs.10 per unit, profit has increased from
Rs.50,000 to Rs.90,000.
It is impractical that only a particular factor or only one factor changes
at a time.In real life,many factors change together. For example, it is
possible to have more sales volume by lowering selling price per unit,
increase in total costs with an increase in sales volume, etc. Thus, a
manager has to study the effect of all these factors at the same time.
Following examples will elucidate this concept.
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C-V-P Analysis
8.3.
Effect of Change in Total Variable Cost and Total Sales Volume.
Example 12: ABC Ltd. is selling 6600 units at Rs.46 each. It is expected that there will be an
increase in variable cost and sales volume from Rs.13 per unit to Rs.18 per unit on sales of 7000
units. Fixed cost is 10,000. Calculate the profit for the firm.
Solution 12:
Sales
Less: Variable Cost
6600 units @ Rs.13 each
And 7000 units @ Rs.18 each
Contribution
Less: Fixed cost
Profit
6600 units are
sold
7000 units are
sold.
303600
322000
85800
126000
217800
196000
10000
10000
207800
186000
Increase in sales revenue due to increase in sales volume is less than increase in variable.
Hence, the overall profit has reduced from Rs.207800 to Rs.186000.
8.4. Effect of Change in Total Variable Cost, Total Fixed Cost, Sales
Volume and Selling Price
A change in total variable cost and total fixed cost will change the total cost of the firm whereas a
change in sales volume or selling price will change the sales revenue to the firm. This can affect
the profitability in following ways:
i) If increase in total cost is more than the increase in total sales revenue then
there will be a decrease in profit.
COST
SALES
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Example 13: A company is selling 1000 units of manufactured goods at Rs.100 each. It incurs
variable cost of Rs. 20 each and a fixed cost of Rs.30,000. It is expected that total variable cost
will increase by 50% and total fixed cost by Rs. 5000.it is also expected that there will be an
increase in sales volume by 100 units. What will happen to the profit of this company?
Solution:
BEFORE CHANGE AFTER CHANGE
IN COST AND
IN COST AND
SALES
SALES
SALES
100000
110000
INCREASE IN SALES BY Rs.10,000
Less: VARIABLE COST
20000
33000
INCREASE IN VARIABLE COST BY
Rs.13,000
CONTRIBUTION
80000
77000
DECREASE IN CONTRIBUTION BY Rs.3000
Less : FIXED COST 30000
35000
INCREASE IN FIXED COST BY Rs.5,000
PROFIT
42000
DECREASE IN PROFIT BY Rs.8000
50000
Rs.
UNITS
Thus, we have seen that due to increase in total cost and no increase in total sales there has been
a fall in profit.
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C-V-P Analysis
ii) If increase in total cost is less than the increase in total sales revenue then there
will be an increase in profit.
COST
PROFIT
SALES
Example 14: A company is selling 1000 units of manufactured goods at Rs.100 each. It incurs
variable cost of Rs. 20 each and a fixed cost of Rs.30,000. It is expected that total variable cost will
increase by 5% and total fixed cost by Rs. 5000.it is also expected that there will be an increase in
sales volume by 100 units. What will happen to the profit of this company?
Solution 14:
BEFORE CHANGE AFTER CHANGE
IN COST AND SALES
IN COST AND SALES
SALES
100000
110000 (1100 X 100) INCREASE IN SALES BY Rs.10,000
Less: VARIABLE COST
20000
23100 (1100 X 21)
INCREASE IN VARIABLE COST BY Rs.3,100
CONTRIBUTION
80000
86900
INCREASE IN CONTRIBUTION BY Rs.6900
Less : FIXED COST 30000
35000
INCREASE IN FIXED COST BY Rs.5,000
PROFIT
51900
INCREASE IN PROFIT BY Rs.1900
50000
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C-V-P Analysis
Rs.
UNITS
Thus, profit has increased by Rs.1900.
iii) If decrease in total cost is more than the decrease in total sales revenue then
there will be an increase in profit.
COST
SALES
PROFIT
Example 15: A company is selling 1000 units of manufactured goods at Rs.100 each. It incurs
variable cost of Rs. 20 each and a fixed cost of Rs.30,000.It is expected that total variable cost
will decrease by 50% and total fixed cost by Rs. 5000.it is also expected that there will be a
decrease in sales volume by 100 units and selling price will increase by Rs.5. What will happen to
the profit of this company?
Solution 15 :
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C-V-P Analysis
BEFORE CHANGE AFTER CHANGE
IN COST AND SALES
IN COST AND SALES
SALES
100000
94500 (900 X 105) Decrease in sales by Rs.5500
Less: VARIABLE COST
20000
9000
CONTRIBUTION
80000
85500
Increase in contribution by Rs.5500
Less : FIXED COST 30000
25000
Decrease in fixed cost by Rs.5,000
PROFIT
60500
Decrease in profit by Rs.1900
iv)
50000
(900 X 10)
Decrease in variable cost by Rs.11000
If decrease in total cost is less than the decrease in total sales revenue then
there will be a decrease in profit.
Example 16: A company is selling 1000 units of manufactured goods at Rs.100 each. It incurs
variable cost of Rs. 20 each and a fixed cost of Rs.30,000.It is expected that total variable cost will
decrease by 5% and total fixed cost by Rs. 5000.It is also expected that there will be a decrease
in sales volume by 100 units and selling price will decrease by Rs.5. What will happen to the profit
of this company?
COST
SALES
PROFIT
Solution 16:
BEFORE CHANGEAFTER CHANGE
IN COST AND
IN COST AND
SALES
SALES
SALES
100000
85500 (900 X 95) Decrease in sales by Rs.14500
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C-V-P Analysis
Less: VARIABLE COST
20000
17100 (900 X 19) Decrease in variable cost by Rs.2900
CONTRIBUTION
80000
68400
Decrease in contribution by Rs.11600
Less : FIXED COST
30000
25000
Decrease in fixed cost by Rs.5,000
PROFIT
50000
43400
Decrease in profit by Rs.6600
v)
If decrease in total cost is less than the increase in total sales revenue then
there will be a increase in profit.
COST
SALES
PROFIT
Example 17: A company is selling 1000 units at Rs.100 each.its total cost is 80000. What will
happen if total cost falls by 50% and total sales increases by 60%.
Solution 17:
BEFORE CHANGE AFTER CHANGE
IN COST
IN COST
AND SALES
AND SALES
SALES
100000
160000
Increase in sales by Rs.60,000
Less: TOTAL COST
80000
40000
Decrease in variable cost by Rs.40,000
PROFIT
20000
120000
Increase in profit by Rs.100000
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C-V-P Analysis
vi)
If increase in total cost is more than the decrease in total sales revenue then
there will be a decrease in profit.
PROFIT
COST
SALES
Example 18: A company is selling 1000 units at Rs.100 each.its total cost is 80000. What will
happen if total cost rises by 50% and total sales falls by 40%.
Solution 18:
BEFORE CHANGE
IN COST
AND SALES
AFTER CHANGE
IN COST
AND SALES
SALES
100000
60000
Decrease in sales by Rs.40,000
Less: TOTAL COST
80000
120000
Increase in variable cost by Rs.40,000
PROFIT
20000
-60000
Decrease in profit by Rs.80000
9. Uses of Break-Even Analysis




Break -even analysis is used to calculate the break-even point of sales either in terms of
rupees or in terms of number of units sold.
It helps to determine the selling price which should be charged to earn the desired profit.
It gives information about profit at different levels of output. It gives an idea about the level
of sales and profit at these output levels and to compare profits at different level of sales.
Helps in determining cash requirement at different levels of operation.etc.
10. Limitations of Break Even Analysis
Although, break-even analysis is a very useful risk assessment technique and a useful
device for testing the sensitivities of business performance, the following limitations must be
considered:
All costs resolved cannot be bifurcated into fixed or variable.
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C-V-P Analysis
Change in variable cost due to change in volume are directly related.
Fixed costs remain constant over the volume range.
There are no changes in selling price, this is hard o believe in real life.
Mix of products do not remain same always.
The efficiency in the use of resources will remain constant over the period.
11. Limitations of C-V-P Analysis
1. In real business situation it is not always easy for any organization to bifurcate their total
costs into fixed and variable costs.
2. Cost and sales are assumed to be linear functions. However, it is not so in real business
situation.
3. Fixed cost does not remain fixed for all levels of output. It is constant for certain range of
production only.
4. Assumption of total sales being equal to total production is again not practically possible all
the times. Firms do have some amount of opening and closing stock.
5. It assumes that there is no change in per unit variable cost and selling price. In real life per
unit variable cost and selling price do change with change in quantity of goods produced and
sold.
6. Sales mix is not constant. Proportion of different products with different cost and revenue
structure in total sales mix is not always constant.
Value Addition 8: Quiz
MCQs
Click on the link below to take a quiz on C-V-P Analysis.
http://www.proprofs.com/quiz-school/topic/cost_volume_profit-analysis
Value Addition 9: Quiz
MCQs
Click on the link below to take a quiz on numerical questions on C-V-P Analysis.
http://highered.mheducation.com/sites/0072396881/student_view0/chapter19/online_tutorial_qui
z.html
Value Addition 10: Quiz
MCQs
Click on the link below to take a quiz on C-V-P Analysis.
http://www.mheducation.ca/college/larson10/student/olc/10fal_tf_25.html
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C-V-P Analysis
Summary:

C-V-P Analysis is a costing technique that is used by managers to understand the
relationship between cost of product, volume of quantity sold and profit from a given
sale and also the effect of change in one or more of these on each other.

There are three techniques of C-V-P Analysis –i)Equation method ii)Contribution margin
method iii) Graphical method

Break-even level of sales is the sales at which firm earns no profit and no loss.

Margin of safety is the difference between actual sales and break-even level sales.

Managers also use C-V-P Analysis techniques to estimate sales required to achieve target
profit.

CVP Analysis helps managers to understand the effect of change in fixed cost, variable cost,
sales volume and selling price on firms profitability.

CVP Analysis is a very useful tool but it also suffers from limitations.
Glossary

Contribution: It is the difference between total sales and variable cost.

CVP: It is an acronym for cost volume and profit in managerial accounting.

Break-Even level: It is the level of sales either in money terms or units of good sold at
which firm earns no profit nor incurs any loss.

Fixed Cost:

Variable cost: A cost that changes with change in the amount of goods and services
produced.

Margin of Safety:
A cost that does not change with a change in the amount of goods or services
manufactured.
Margin of safety is the extent by which actual sales exceed the no profit no
loss level of sales i.e. break-even sales.
Review Illustrations:
Question 1: From the following information, calculate selling price per unit if the breakeven-point is 90,000 units:
Variable Cost per unit: Rs. 96
Fixed Cost: 3,76,000.
Solution: Breakeven point
=
Fixed Cost
Contribution Per Unit
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C-V-P Analysis
90,000
=
3, 76,000
SP 96
90,000(SP-96) = 3, 76,000
90,000 SP = 3, 76,000 +86, 40,000
SP = 9016000/90,000
SP = 100.17 (approx)
Question 2: You are given the following data:
Break-even Point: Rs. 1, 00,000
Fixed Expenses: Rs.40,000
Work out
i P/V Ratio
ii. Profit if sales are 2,00,000
iii. New break-even point if there is a fall in selling price by 10%
Solution: In this problem, break-even point i.e. Sales at which there is no profit and no
loss is Rs.1,00,000. Fixed cost is 40,000.therefore at break- even level contribution must be
equal to fixed cost i.e.Rs.40,000. So,
I. P/V Ratio =
Contribution
Sales
=40000 X 100
100000
= 40%
Ii. Contribution when sales are 200000 is 40% of 200000 = 80,000
Profit = contribution – fixed cost = 80,000 – 40,000 = 40,000
Iii. If selling price reduces by 10 % then sales will be = 1,80,000
Variable cost =1,20,000
Contribution = 1,80,000 – 1,20,000 = 60,000
New P/V Ratio = 60,000/1,80,000 =33.3%
New break even point = 40,000/33.3% = 120120.12(approx)
Question 3: Hareorna Ltd makes a standard model of CD players, which it sells for rs 60
each. It is planning to make and sell 20,000 radios next year. The business‘s costs are as
follows:
Rs.
Manufacturing
Variable materials
Variable labour
20 per radio
14 per radio
Other variable costs
12 per radio
Fixed costs
80,000 per year
Administration and selling
Svariable
3 per radio
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C-V-P Analysis
Fixed
60,000 per year
You are required to:
a. Evaluate the break-even point for the next year; express both in quantity of radios and
sales value.
b. Evaluate the margin of safety for next year; express both in quantity of radios and sales
value.
Solution:
a) Break-even Point = Fixed Costs/Contribution Per Unit
= (80,000 + 60,000)/(60 –(20 +14+12+3)) =12,727 radios
These would have a sales value of Rs.7, 63,620
b) The margin of safety is 7,273 radios. This margin would have a sales value of Rs.4, 36,380.
i)
Question 4: Akronia garments can purchase t-shirts at Rs.320 each from a local factory,
other variable cost amount to Rs.100 per unit. The average selling price is Rs.700 and total
fixed cost amount to Rs. 840000.
i) How much income will the business receive if 2500 units are sold?
i) How much variable cost will the business incur?
ii) What is the contribution margin when 2500 t-shirts are sold?
iii) What is the P/V Ratio?
Solution:
Sales revenue from 2500 t-shirts = 2500 X 700 = 17,50,000
ii)
Variable cost for the business
iii)
Total Contribution margin on sales = 17,50,000 – 10,50,000 =7,00,000
iv)
P/V Ratio
= 2500 X 420 = 10,50,000
= ( 7,00,000/17,50,000) X 100 = 40%
Question 5: Mahendra Tyres sell automobile parts to service stations for an average price
of Rs.50 each. The cost of each tyre is Rs.30 and monthly fixed built-up costs total Rs.15,000.
Company has an additional monthly fixed cost of Rs.12,000.
Calculate:
A. What is the break-even units of automobile parts?
B. What is the margin of safety, assuming sales to be Rs.90,000?
C. What is the break-even level, assuming variable costs hikes by 20 percent?
D. What is the break-even level, assuming the selling price rises by 10%, fixed
manufacturing costs falls by 10% and other fixed costs decline by Rs.1500?
Solution
A. Break-even units = fixed cost/contribution per unit
= 27000/20 =1350 parts
B. Margin of Safety = Rs.90,000 - (Rs.50 x 1350) = Rs.22500
C. If variable cost increase by 20% then variable cost = Rs.36
Break-even level = 27000/14 = 1928.57(approx)
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C-V-P Analysis
D. If selling price goes up by 10%, new selling price per unit = Rs.55
If fixed manufacturing costs falls by 10 percent then fixed cost = Rs.13500
If other fixed costs decline by Rs.1500 then total fixed cost =Rs. (13500 + 10500) =
Rs.24000
Break-even level = 24000/25 = 960 parts
.
Question 6: Calculate contribution in each of the following independent situations:
I) Margin of safety Rs.35000; Fixed cost Rs.50,000; P/V Ratio 25%
Ii)P/V Ratio 40%; Profit Rs.60,000; Break-even point Rs.1,00,000
Solution:
I)
Ii)
Contribution = (M/S X P/V ratio) + fixed cost
= (35000 x 25%) + 50,000
= Rs. 58750
Contribution = (Break even point X P/V ratio) + Profit
= ( 1,00,000 X 40%) + 60,000
=Rs.1,00,000
Question 7: Find the missing figures:
Selling price per unit
Variable cost as % of sales
Number of units sold
Contribution
Fixed cost
Profit
Rs.40
75%
?
?
Rs.2,40,000
Rs.60,000
Solution:
Contribution = Fixed Cost + Profit =3,00,000
P/V Ratio = 100% – 75% = 25%
Contribution Per Unit = 40 X 25% = 10
Number of units sold = Total Contribution/Contribution Per Unit = 3,00,000/ 10 =30,000
units.
A. Objective Type Questions:
I. State True or False:
1. At break-even point contribution margin is equal to fixed cost.
2. Margin of safety is greater than actual sales.
3. If contribution margin increases in spite of no change in sales volume and selling
price then it means variable cost per unit has increased
4. After break-even point level of sales , contribution margin and profit of firm become
equal.
5. C-v-p- analysis is a tool for managers‘ assistance.
6. There can be more than one break-even point for a multinational company.
7. The gross margin equals sales price minus cost of goods sold, including fixed cost.
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C-V-P Analysis
8. The margin of safety measures the amount by which sales may decline after losses
occur.
9. C-V-P analysis is for long term planning.
10. Composite breakeven point is calculated to know a single break-even point in a
multiproduct firm.
II. Multiple Choice Questions:
1. CVP Analysis studies the effect of:
i.
Changes in selling price per unit and variable cost per unit on a company's
profitability.
ii.
Changes
in sales
level
and
variable
costs and
fixed
cost
on
company's profitability.
iii.
Changes
in
product
sales
mix
on
a
company's profitability.
iv. All of the above.
2. At break-even sales level:
i.
ii.
iii.
iv.
Total costs are equal to total sales revenue.
Total profit equals total sales
Variable costs equal fixed costs.
Firm attains its objectives
3. P/V Ratio shows relationship between
i.
ii.
iii.
Contribution and sales
Fixed cost and sales
Change in cost and change in sales.
4. An increase in fixed cost will lead to
i.
ii.
iii.
iv.
An increase in break-even point
A decrease in break-even point
No change in break-even point
Any of the above change can take place.
5. Change in profit is 600 and change in sales is 2000. What will be the P/V Ratio?
i.
ii.
iii.
iv.
40%
30%
20%
10%
Answers to Objective Type Questions:
I.
Answers to state true or false:
1. True
2.False
3.False
4.True
5.True
6. False
7.True
8.False
9.False
10.True
Institute of Lifelong Learning, University of Delhi
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C-V-P Analysis
II.
Answers To Multiple Choice Questions:
1. iv
2.i
3.i
4.i
5.ii
B. Theoretical Questions:
1)
2)
3)
4)
5)
6)
7)
What do you understand by C-V-P Analysis?
Why is the study of C-V-P Analysis important for managers?
Explain the concept of break-even point with the help of a graph.
What is margin of safety?
What are the assumptions of C-V-P Analysis?
What are the limitations of C-V-P Analysis?
How change in cost and sales volume can affect the profit of a firm?
C. Numerical Questions:
1) You are provided with the following data relating to a soap manufacturing company:
Soap Bar
Liquid Soap
Selling price of one pack
Rs.4
Rs.6
Variable Cost of one pack
Rs.1
Rs.2
The total fixed cost for the firm amount to Rs.400,000.
What is the break-even point, assuming the sales mix consists of two units of Product
A and one unit of Product B?
2) Mr. A has been doing business for past 20 years. He is selling two products to
customers. The ratio of these two products namely product w and product z in the
sales mix is 2:1. He is able to sell product w at a price of Rs.40 each and product z at
a price of Rs.50 each. The variable cost of both products is Rs.30 each. How many
units of both the products should be sold to achieve break-even point?
3) Mr. X is selling 4000 units of Good A whose average cost was Rs.10 per unit. He was
selling 3000 units of the same product at an average cost of Rs.15 each. The breakeven point is 4000 units. Find the P/V ratio.
4) Following particulars are available about a firm which is selling 20,000 units of a
product currently:
Material
4,00,000
Labour (70% variable)
2,00,000
Factory and administrative overheads (30% variable)
80,000
Institute of Lifelong Learning, University of Delhi
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C-V-P Analysis
I.
II.
What should be the selling price to earn a profit of 10% on sales of 20,000
units?
What will be the break-even point in units if selling price is Rs.20 per unit?
Answers to Numerical Questions:
1. Packs of liquid soap = 4,000 units; packs of soap bar = 8,000 units
2. 10,000 units of product w and 5000 units of product z.)
3 . 50%
4. I-37.8(approx), II-4113 units (approx)
References:
1. Work Cited and Suggested Readings:

Charles T. Horngreen, Lary L., Sundern and William O. Stratton, ―Introduction to
Management Accounting‖, Prentice Hall of India Ltd., New Delhi.

Jawahar Lal, ―Managerial Accounting‖, Himalaya Publishing House, 2001.

Khan, M.Y. and P.K.Jain, ―Management Accounting‖, Tata Mcgraw Hill, New Delhi

kimmel, P.D., J.J. Weygandt and D.E. Kieso, ―Financial Accounting: Tools for
Business Decisions‖, John. Wiley & Sons, 2000.
2. Web Links:





www.cmawebline.org
www.willey.com/college/sc/eldenburgh/cho3.pdf
www.schprojects.com
www.thestudentroom.co.uk
http://www.accounting4management.com/assumptions_of_cvp_analysis.htm
3. Video Links:



Click on the link http://www.youtube.com/watch?v=69mVcnewPbw to know more about
break-even analysis.
http://www.youtube.com/watch?v=2P2XDTacOZc to learn more about break-even analysis.
Click on the link http://vimeo.com/58297916 to view a video on graphical method of C-V-P
Analysis, including break even analysis, sensitivity analysis, operating leverage and other
concepts related to Cost-Volume-Profit analysis.
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