In: Accounting
What does CVP Analysis stand for? What type of income statement must be used when performing CVP Analysis? What is the target profit when solving for the break-even point? The formulas to find Target profit and/or Break-even point in units and Target profit and/or break-even point in dollars differs by one number. Explain how these formulas are alike and the one number that makes them different.
The contribution margin income statement must be used when performing CVP Analysis because this income statement breaks out the variable and fixed expenses separately. Variable expenses like variable production costs, such as raw materials, direct labor and variable marketing and administrative expenses, such as commission expenses and the salaries of supervisors. The fixed expenses like production and overhead costs, such as building and equipment maintenance costs, insurance and administration. |
The Target Profit when solving for the break-even point is 'Zero' i.e, the Total contribution should be equal to fixed cost. |
The formulas to find Target profit and/or Break-even point in units |
Fixed cost / Contribution per unit to find Break -even point in units |
Fixed cost + Target profit / Contribution per unit to find Target profit in units |
Formula to find Target profit and/or break-even point in dollars |
Fixed cost / PV ration to find Break-even point in dollars |
Fixed cost + Target Profit / PV ration to find Target profit in dollars |
These formulas are alike because the result of the formula is to find the Break even point or traget profit. The purpose is the same in both the formulas |
One formula shows the result in number of units to be sold to achieve target profit or for finding break-even point. |
The other formula shows the value in sales to achieve target profit or reach break-even sales |
Example |
Sale price per unit: $200 |
Variable costs per unit: $100 |
Total fixed costs: $100,000 |
Target profits: $100,000 |
Contribution = Sales - variable cost. So, $200-$100= $100 |
Fixed cost / Contribution per unit : $100,000/100 = 1000 Units |
PV ration = Contribuion / Sales x 100 : $100/$200 x100 = 50% |
Fixed Cost / PV ratio : $100,000/50% = $200,000 Sales value |
Now, Break even poin in units is 1000 units or 1000 units x $200 per unit = $200,000 which is Break even poin in dollars |
To find Target profit Fixed cost + Target profit / Contribution per unit |
$100,000 + $100,000/100 = 2000 Units |
Fixed Cost + Target profit / PV ratio : $100,000 + $100,000/50% = $400,000 Sales value |