Question

Create a simple product or service that you would like to sell. Present the following (show your calculations) in a written document:

1. Cost per unit—variable costs per unit only, and fixed costs with an assumed level of production.
2. Sales price per unit
3. Selling and Administrative costs-- variable costs per unit only, and fixed costs with the same assumed level of production that was used in #1.
4. Breakeven point in units and in dollars.
5. CVP income statement using an assumed level of sales that does not exceed the assumed level of production used in #1.

Answer 1

CVP: CVP refers to Cost Volume Profit Analysis. unlike a Regulare income statement it has a different format. This is used to know how the variabe and fixed costs changes with changes in the volume of production. It is also called as Break Even Analysis

Suppose I take a Product A, with an assumed level of production of 10,000

The cost of the product is as folows

Variable cost per unit = $6

Fixed Costs = $5,000

Selling and administration - $1 per unit

Fixed Costs - $3000

Selling price - $10 per unit

Particulars	10,000 Units
Sales (@$10)	$100,000 (10,000 * $10)
Less: Variable Costs ($5+$1)	($60,000) (10,000*$6)
Contribution Margin	$40,000 ($100,000 - $60,000)
Fixed Costs ($5,000 + $3000)	($8,000)
Net Profit	$32,000

This income statement is drawn to know the break even point

Break Even Point in Unit and Dollars

1) Break Even Point in Unit = Fixed Costs / Contribution per unit

= 8,000 / ($10 - $6)

= 8,000 / 4

Break Even Point in Unit =   2,000 units

2) Break Even Point in Dollars = Fixed costs/ Contribution Sales Ratio

= $8,000 / ($4/$10)

= $8,000 / 0.4

Break Even Point in Dollars = $20,000

CVP Income statement at 8,000 units of sales

CVP Income Statement at 8,000 units of sales
Particulars	8,000 units
Sales (@$10)	$80,000 (8,000 * $10
Less: Variable Costs ($5+$1)	($48,000) (8,000 * $6)
Contribution Margin	$32,000 ($80,000 - $48,000)
Fixed Costs ($5,000 + $3000)	($8,000)
Net Profit	$24,000