FREE 11+ Cost Volume Profit Analysis Samples & Templates in PDF | MS Word

Cost-Volume-Profit (CVP) analysis is a method used in managerial accounting business to evaluate the impact of changes in sales volume and cost structure on a company’s operating profit and breakeven point. It helps account managers determine the level of business sales required to cover all costs and achieve a desired level of profit. CVP analysis takes into account fixed costs, variable costs, sales price, and volume to determine the relationship between changes in these factors and the company’s volume profit.

How To Make a Cost Volume Profit Analysis?

One of the key advantages of CVP analysis is that it allows companies to see how changes in sales volume and costs will affect their bottom line. For example, if a company is considering increasing its sales price, it can use CVP analysis to determine the impact of this change on its profits. Similarly, if a company is considering reducing its costs, it can use CVP analysis to determine the impact of this change on its breakeven point. Cost-Volume-Profit (CVP) analysis is a systematic process that involves the following steps:

Step 1- Gather Data

Start by gathering information on all of your costs, including fixed costs and variable costs for each unit of product sold. This includes raw materials, labor, overhead, etc. Determine selling price: Establish the price at which you plan to sell each unit of product.

Step 2- Calculate Contribution Margin

The contribution margin is calculated by subtracting the variable costs per unit from the selling price per unit. The contribution margin represents the amount that contributes to covering fixed costs and generating profit.  Fixed costs are costs that do not change with the level of production or sales, such as rent, salaries, insurance, etc.

Step 3- Calculate Points

The break-even point is the point at which total revenue equals total costs, including both fixed and variable costs. To calculate the break-even point, divide fixed costs by the contribution margin. This will give you the number of units that must be sold to reach the break-even point.

Step 4- Plot the Graph

Create a CVP graph with the horizontal axis representing units sold and the vertical axis representing total costs and total revenue. Plot the fixed costs, variable costs, and total revenue lines on the graph to visually see the relationship between costs and revenue at different levels of sales.

Finally, use the CVP analysis to make informed business decisions, such as determining the optimal production and sales levels, setting prices, and making changes to production processes to reduce costs.