Question

Do you think the focus of a Cost Volume Profit (CVP) analysis is the unit cost of an item, the overall profitability of a new product, the profitability of a department manufacturing a new product, or some combination of all of these items?

Explain your reasoning.

Answer 1

CVP Analysis is used to determine how the changes in costs and volume will affect a company's operating income and Net profit. This analysis is also used to determine how much sales a company should make during a period to achieve the targeted profit.

It helps in determining the unit cost of a product, by taking into consideration the variable cost and fixed cost and the profit targeted. Break even point is where there is a situation of no profit or no loss is experienced. The company just covers the cost with revenue. There are 3 methods used to calculate the break even point

1. Equation Method

2. Contribution Margin Method and

3. Graphical Method

Below is the example for how to calculate the Break even point using Equation Method

Situation: Company A is manuaturing candies. The variable cost incurred in producing each unit is $20, Fixed cost incurred on purchase of machinery and other such expenses is $300,000. The company decides to sell each candy for $50. In order to determine break even point in such scenario, we need to do calculation as below.

Let the number of quanties to be sold to attain break even point be "Q"

Profit at breakeven point (P) = 0

Variable cost per unit(VCU) = $20

Selling Price per unit(SPU) = $50

Fixed Cost (FC) = $300,000

At break even point,

Revenue-VCU-FD=0

i.e., ($50xQ)-($20xQ)-$300,000=0

$50Q-$20Q=$300,000

$30Q=$300,000

Hence Q=10,000 units

From the above we can conclude that the CVP analysis is used to determine what should be the volume of sales required to achieve the targeted profit of a new/existing product and there by determine the overall profitability of a department manufacturing the new product.