CMA(US)  Part 2 | CVP Analysis | www.LetslearnGlobal.com (A must watch)
Channel: LetsLearn Global
Date: 04/11/2018

Cost-Volume-Profit Analysis is a method used for analyzing how various operating decisions and marketing decisions will affect profit. This planning tool analyzes the effects of changes in volume, sales mix, selling price, variable expense, fixed expense, and profit. The CVP analysis is often referred to as the break-even analysis. It is a simple model that assumes sales volume is the primary cost driver. The CVP analysis can be used to find the desired profit in revenue and planning.

Types of Costs :
Fixed costs remain fixed, or constant, regardless of unit volume. For example, if the floor space expenses, manager's salaries, and janitorial services, do not change with unit volume, they are fixed costs.

Variable costs

These costs vary in direct proportion to quantity sold or unit volume. Variable costs for selling goods, for instance, might include the "direct cost" the seller pays to acquire each unit. As a result, the total variable cost can be "cost per unit" multiplied by the unit volume.

Contribution:
Contribution Margin (CM) is the difference between sales revenue and variable costs. It is the measure of the profit margin that focuses on the proportion of sales revenue which is left after the deduction of variable costs associated with the product.
Contribution is the amount which is left after subtracting variable costs from the revenues. This is the amount which is left to cover the fixed expenses of an organization, or to add to the profits of the organization.


Break Even Point:

Break-even point usually means the business volume that balances total costs with total gains. At break-even volume, in other words, total cash inflows equal total cash outflows. At break even, in other words, net cash flow equals zero.

Business people calculate break-even to answer questions like these:

How many product units must we sell to break even?
How many rooms must we rent to cover costs?
At what unit sales volume do we earn a profit?
The term break even is a verb, as in "When do we break even?" The form break-even is an adjective, as in "The break-even point." However, it is also correct to spell the adjectives as break even or breakeven.

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