Cost-Volume-Profit Analysis
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define Cost-Volume-Profit analysis
➛ Identify fixed and variable costs in CVP
➛ Calculate contribution margin
➛ Calculate break-even point | units & sales
➛ Analyze the relationship between cost, volume, and profit
➛ Use CVP for decision-making
Key Vocabulary
➛ CVP Analysis
➛ Contribution Margin
➛ CM per Unit
➛ Break-Even Point
➛ Fixed Costs
➛ Variable Costs
➛ Profit
➛ Sales Volume
What Is CVP Analysis?
CVP analysis studies
➛ How changes in cost and sales volume affect profit
It helps businesses plan
➛ Pricing
➛ Production levels
➛ Profit targets
Key Formulas
1. Contribution Margin
CM = Sales − Variable Costs
2. Contribution Margin per Unit
CM per Unit = Selling Price − Variable Cost per Unit
CM per Unit = Selling Price − Variable Cost per Unit
3. Break-Even Point | Units**
Break-Even Units = Fixed Costs ÷ CM per Unit
Break-Even Units = Fixed Costs ÷ CM per Unit
4. Break-Even Sales | Revenue
Break-Even Sales = Break-Even Units × Selling Price
Break-Even Sales = Break-Even Units × Selling Price
Example Calculation
Given
Selling price =
Variable cost =
Fixed costs =
Variable cost =
Fixed costs =
$50
$30
$40,000
$30
$40,000
Step 1
CM per Unit
50 − 30 = 20
Step 2
Break-Even Units
40,000 ÷ 20 = 2,000
Step 3
Break-Even Sales
2,000 × 50 = 100,000
Results
CM per unit =
Break-even =
Break-even sales =
Break-even =
Break-even sales =
$20
2,000 units
$100,000
2,000 units
$100,000
Profit Formula
Profit = (CM per Unit × Units Sold) − Fixed Costs
CVP Insights
Situation
Higher sales volume
Higher fixed costs
Higher variable costs
Higher selling price
Higher sales volume
Higher fixed costs
Higher variable costs
Higher selling price
Result
Higher profit
Higher break-even
Lower profit
Higher profit
Higher profit
Higher break-even
Lower profit
Higher profit
True or False
➛ CVP analysis focuses on cost, volume, and profit
➛ Fixed costs change with production
➛ Contribution margin is sales minus variable costs
➛ Break-even point is where profit is zero
Fill in the Blanks
1. CM per unit = selling price − __________
2. Break-even units = fixed costs ÷ __________
3. At break-even, profit equals __________
4. Variable costs change with __________
Calculation Practice
A company has
Selling price =
Variable cost =
Fixed costs =
Variable cost =
Fixed costs =
$80
$50
$60,000
$50
$60,000
➛ Calculate CM per unit
➛ Calculate break-even units
➛ Calculate break-even sales
Profit Calculation
A business sells 3,000 units.
CM per unit =
Fixed costs =
Fixed costs =
$25
$50,000
$50,000
Calculate profit
Mini Case Study
A company wants to launch a new product and must decide on pricing.
Questions
➛ How can CVP help determine the selling price?
➛ What happens if variable costs increase?
➛ How can the company lower its break-even point?
➛ Why is contribution margin important?
Quick Quiz
➛ What is CVP analysis?
➛ What is contribution margin?
➛ How is break-even calculated?
➛ What happens at break-even?
➛ How can profit be increased?
Answers ➧ Here
Module 5 ➧ Here