Question

Discuss a practical application in your life for CVP. It can be personal, on the job, or a dream of starting your own business.

Discuss the variable costs, and the fixed costs involved, and what it takes to break-even.

Answer 1

CVP analysis or Cost-Volume Profit Analysis is the analysis of cost (i.e., both fixed and variable) and volume (i.e., Sales). These analyses are very important for decision making and various business situations.

Variable cost is the cost per unit and which will not change irrespective of the change in volume or number of units sold. In other words, variable cost per unit remains same.

Fixed cost is the cost of product on fixed basis which is same in total amount irrespective of change in number of units sold.

Breakeven is the situation where company has neither net income nor net loss. In other words, it is the point where company experiences sales = fixed cost plus variable cost.

Let us understand the variable cost, fixed cost and break even with following example:

Say,

Sales = $110,000

Variable cost = $4 per unit

Selling price = $11

Number of units sold = 10,000

Fixed cost = $40,000

Now,

Breakeven point = Fixed cost / Contribution per unit

= $40,000 / ($11-$4)

= 5,714 units is breakeven point

Breakeven point in percentage:

Break even sales = Fixed cost / P/V ratio

= $40,000 / ($11-$4) / $11

= $40,000 / 0.6364

= $62,854