The contribution margin is the difference between the entire revenue and total variable cost. The contribution margin per unit is the difference between the selling price per unit and variable cost per unit. It is a pointer that shows the changes in operating financial gain with alteration in the number of units. The contribution margin per unit is calculated as follows
The total contribution margin is calculated by multiplying contribution margin per unit by the total number of units. The total contribution margin is calculated as follows:
p = Selling price per unit
v = Variable cost per unit
Q = number of units sold
F company selling price is $100 per case and the variable cost per unit is $80. The total number of cases produced is 50000 cases. The total contribution margin is calculated as follows:
The total contribution margin for F company is
Cost volume and profit analysis is a technique that scrutinizes the variation in cost and volume levels and its effect on profit. This technique examines the effect of operating decisions on short-term profit. It defines the relationship between selling price, fixed cost, the variable value, price at which per unit can be sold and the output level.
CVP analysis relies on a few assumptions. They are as follows:
1. For a given range of output, the revenue activity and the overall cost(fixed cost and variable cost) are probable to be linear. The assumption is based on a given CVP model on a given vary of activity and these are not valid outside of the appropriate range.
2. There are two components of total cost: fixed cost and variable cost. Fixed costs stay constant with a rise and reduce within the units of goods and services produced or sold. A fixed cost remains unchanged in total in a given period despite wide variation in the total activity and volume. Variable costs modify in proportion with a rise and reduce in the units of goods and services produced or sold. A variable cost changes in total in a given period with vary in the total activity and volume.
It is a point at which gains equal losses; it means there are no gains and losses by doing that particular task.
At this break-even point cost or expenses are equal to revenue. This break-even point will be calculated by the following formulas.
• Cost-volume-profit (CVP) analysis extends the use of information provided by breakeven analysis.
• The main important part of CVP analysis is the point, where total revenues equal total costs. That is both fixed and variable.
• At this breakeven point (BEP), an enterprise will experience no income or loss.
• This BEP is an initial examination, which is done previous to the more detailed CVP analyses.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis.
The assumptions underlying CVP analysis are:
1. CVP analysis studies the behavior of both costs and revenues simultaneous throughout the relevant range of activity. (This assumption resembles the concept of volume discounts on either purchased materials or sales.)
2. CVP is useful for classifying accurately, as either fixed or variable.
3. Changes in activity are the only factors that affect costs.
4. All units produced are sold (there is no ending finished goods inventory).
5. When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
• Finding the breakeven point is the initial step in CVP, since it is most important to know whether sales at a given level will at least cover the relevant costs.
The breakeven point can be determined with a mathematical equation, using contribution margin, or from a CVP graph.