Question

Explain single product cost-volume-profit (CVP) and break-even analysis. Provide a hypothetical example of CVP and breakeven analysis. Provide in-text citations and explain your example in detail.

Answer 1

Cost volume profit shows the relation between sales volume, price and costs, these three factors affects the profit of company. Such CVP analysis used in decision making for the company. Profit volume(PV) ratio is one of the ratio from CVP analysis. PV ratio is the ratio between Contribution and sales of the company.

For example:- Let's say Sales of the company is $10,000,000 and variable cost = $3,585,000

Contribution will be Sales-variable cost = $10,000,000 - $3,585,000 = $6,415,000

PV ratio = Contribution/sales *100 = $6,415,000 / $10,000,000 * 100 = 64.15%

Here in this example, PV ratio of 64.15% is the contribution before fixed cost that a company has earned from its sales.

Break Even Analysis:-

Break even analysis show the situation where the company is at zero profit situation, means no profit no loss situation. Break even analysis or the break even point is the point that given the level at which company earns no profit or incurred no loss. Break even point is one of the analysis that comes under Break even analysis. Break even analysis is the ratio between fixed cost and PV ratio (%) of the company.

For example;- Let's say in the above example Fixed cost of the company is $1,300,000 and PV as calculated in the above example is 64.15% , Break even point will be Fixed cost / PV ratio = $1,300,000 / 64.15% = $2,026.500. This is the point where company is at zero profit/loss situation means company incurred no loss and earned zero profit.