Cost volume profit Analysis Cost volume profit analysis is a kind of cost accounting.

It is a simplified model u seful for rudimentary instructions and for short-run decisions. CVP analysis expands the use of information provided by breakeven analysis. A cr itical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experi ence no income or loss. This break-even point can be an initial examination that precedes more detailed CVP analysis. CVP analysis employs the same basic assumptions as in breakeven analysis. The as sumptions underlying CVP analysis are: The behavior of both costs and revenues is linear throughout the relevant range of activity. Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold there is no ending finished goods inventory. When a business entity sells more than one type of product, the sales mix (the r atio of each product to total sales) remains constant. The components of CVP analysis are: 1. 2. 2. 4. Level or volume of activity Unit selling prices Variable cost per unit Total fixed costs

CVP assumes the following: Constant sales price; Constant variable cost per unit; Constant total fixed cost; Constant sales mix; Units sold equal units produced. These are simplifying assumptions, which are often implicitly assumed in element ary discussions of costs and profits. In more advanced practice, costs and reven ue are nonlinear and the analysis is more complicated, but the intuition afforde d by linear CVP remains basic and useful. One of the main methods of calculating CVP is profit volume ratio which is contribution /sales*100 = profit volume ratio contribution = sales minus variable costs Therefore it gives us the profit added per unit of variable costs. The break-even analysis represents the sales amount in either unit or revenue ter ms that is required to cover total costs (both fixed and variable). Profit at bre ak-even is zero. Break-even is only possible if a firm s prices are higher than it s variable costs per unit. If so, then each unit of the product sold generates s ome contribution toward covering fixed costs. In business scenario, the break-even point (BEP) is the point at which cost or e xpenses and revenue are equal: there is no net loss or gain, and one has "broken even." A profit or a loss has not been made, although opportunity costs have be en "paid," and capital has received the risk-adjusted, expected return. In short

, all costs that needs to be paid are paid by the firm but the profit is equal t o 0.