2. Cost Volume Profit analysis is one of the most
powerful tools that helps management to make
their decision in relation to cost, volume and
profit of an organization.
4. Assumptions of CVP Analysis
Selling price is constant.
Costs are linear.
In multi-product companies, the sales mix is constant.
In manufacturing companies, inventories do not change
6. Contribution Margin, and Contribution
Margin Ratio
Calculation:
Contribution margin (CM) = Sales – Variable cost (VC)
o If sales is Tk. 60 per unit and VC Tk. 42 then the CM will be
Tk. 18 (60 -42)
Contribution margin ratio (CMR) = (CM/Sales) x 100
o Here; (18/60) x 100 = 30%
7. Contribution Margin Ratio
We can also calculate CM ratio by deducting VC ratio from 100
VC ratio (VCR) = (VC/Sales) X 100
So, using the previous example, VCR = (42/60) x 100 = 70%
Then the CMR will be (100 – 70)% = 30%
8. Break Even Point Calculation
Break-even analysis can be approached
in two ways:
1. Equation method
2. Contribution margin method
9. Break Even Point Calculation
Equation Method
Profits = (Sales – Variable expenses) – Fixed expenses
Or,
Sales = Variable expenses + Fixed expenses + Profit
Note: At the break-even point profits equal zero
Let, a Pen Company sells Pen to Wholesalers. The pens are sold for
Tk. 60 each. Variable costs are Tk. 42 per pen, and fixed costs total
Tk. 45000 per year. The company is currently producing and selling
3000 pen per year.
10. Break Even Point (BEP) Calculation
Equation Method
Sales = Variable expenses + Fixed expenses + Profit
Let the BEP quantity is Q
So, (using the given example):
60Q = 42Q + 45,000+0
18Q = 45,000
BEP (Quantity) = 2,500 units
BEP (amount) = 2500 x 60 = Tk. 150,000
12. Break Even Point (BEP) Calculation
CM Method
BEP (Quantity) =
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
= 45,000/18
= 2,500 units
BEP (amount) = Fixed cost/contribution margin ratio
= 45,000/30%
= 150,000
