2. Profit is a monetary gain a business produce 
after saleing products .a profit analysis is a
break down of a business applying a monetary
amount for each element and performing
calculations to determine what profit is .
In the business world profit analysis most often 
referred to as cost volume profit (CVP) analysis
.

3. in managerial economics is a form of cost 
accounting . It is a simplified model, useful for
elementary instruction and for short-run
decisions.
It is a technique that examines changes in 
profits in response to changes in sales volumes,
costs, and prices. Accountants often perform
analysis to plan future levels of operating CVP
activity and provide information about:

4. 1- Which products or services to emphasize 
2- The volume of sales needed to achieve a 
targeted level of profit
3- The amount of revenue required to avoid 
losses
4- Whether to increase fixed costs 
5- How much to budget for discretionary 
expenditures
6-Whether fixed costs expose the organization 
to an unacceptable level of risk

5. CVP analysis begins with the basic profit 
equation .
Profit = Total revenue - Total costs 
Separating costs into variable and fixed
categories, we express profit as: 
Profit = Total revenue - Total variable costs - 
Total fixed costs

6. The contribution margin is total revenue 
minus total variable costs. Similarly, the 
contribution margin per unit is the selling
price per unit minus the variable cost per unit.
Both contribution margin and contribution
margin per unit are valuable tools when
considering the effects of volume on profit

7. Contribution margin per unit tells us how 
much revenue from each unit sold can be
toward fixed costs applied
Once enough units have been sold to cover 
all fixed costs, then the contribution margin per 
unit from all remaining sales becomes profit.
If we assume that the selling price and variable 
cost per unit are constant, then total revenue

8. is equal to price times quantity, and total variable cost is 
variable cost per unit times quantity
We then rewrite the profit equation of the 
contribution margin per unit
Profit = P * Q - V * Q - F = (P - V ) * Q - F 
where 
P Selling price per unit 
V Variable cost per unit 
(P - V ) Contribution margin per unit 
Q Quantity of product sold (units of goods or 
services)
F Total fixed costs 

9. We use the profit equation to plan for different 
volume of operation
CVP analysis can be performed using either : 
1- Units (quantity) of product sold 
2- Revenues (in dollars) 
CVP Analysis in Units 
We begin with the preceding profit equation. 
Assuming that fixed costs remain constant, we
solve for the expected quantity of goods or services 
must be sold to achieve a target level of profit

10. CVP analysis employs the same basic 
assumptions as in breakeven analysis. The
assumptions underlying CVP analysis are:
The behavior of both costs and revenues is 
linear throughout the relevant range of activity.
(This assumption precludes the concept of
volume discounts on either purchased
materials or sales.)

11. cost can be classified accurately as either fixed 
or variable.
Costs Changes in activity are the only factors 
that affect costs.
All units produced are sold (there is no ending 
finished goods inventory).
When a company sells more than one type of 
product, the sales mix (the ratio of each
product to total sales) will remain constant

12. The components of CVP analysis are: 
Level or volume of activity 
Unit selling prices 
Variable cost per unit 
Total fixed costs 
Sales mix 

13. CVP assumes the following: 
Constant sales price; 
Constant variable cost per unit; 
Constant total fixed cost; 
Constant sales mix; 
Units sold equal units produced. 
. 

14. These are simplifying, largely linearizing, 
which are often implicitly assumed in
elementary discussions of costs and profits. In
more advanced treatments and practice, costs
and revenue are nonlinear and the analysis is
more complicated, but the intuition afforded by
linear CVP remains basic and useful.

15. One of the main methods of calculating CVP is 
profit–volume ratio: which is (contribution
/sales)*100 = this gives us profit–volume ratio.
contribution stands for sales minus variable 
costs.
Therefore it gives us the profit added per unit 
of variable costs

16. Basic graph of CVP, demonstrating relation of total 
costs, sales, and profit and loss
The assumptions of the CVP model yield the 
following linear equations for total cost and total
revenue (sales):
These are linear because of the assumptions of 
constant costs and prices, and there is no
distinction between units produced and units sold,
as these are assumed to be equal. Note that when
such a chart is drawn, the linear CVP model is
assumed, often implicitly.
In symbols: 

17. TC=TFC+V.X 
TR=B.X 
where 
TC = Total costs 
TFC = Total fixed costs 
V = Unit variable cost (variable cost per unit) 
X = Number of units 
TR = S = Total revenue = Sales 
P = (Unit) sales price 
Profit is computed as TR-TC; it is a profit if positive, a 
loss if negative.

18. Costs and sales can be broken down, which 
provide further insight into operations.
Decomposing total cost as fixed cost plus 
variable cost.
Decomposing sales as contribution plus 
variable costs

19. Following a matching principles of matching a 
portion of sales against variable costs, one can
decompose sales as contribution plus variable
costs, where contribution is "what's left after
deducting variable costs". One can think of
contribution as "the marginal contribution of a
unit to the profit", or "contribution towards
offsetting fixed costs".
In symbols: 

20. where 
C = Unit Contribution (Margin) 
Profit and loss as contribution minus fixed 
costs
Subtracting variable costs from both costs and 
sales yields the simplified diagram and
equation for profit and loss.
Diagram relating all quantities in CVP. These 
diagrams can be related by a rather busy
diagram, which demonstrates how if one
subtracts variable costs, the sales and total costs

21. lines shift down to become the contribution 
and fixed costs lines. Note that the profit and
loss for any given number of unit sales is the
same, and in particular the break-even point is
the same, whether one computes by sales =
total costs or as contribution = fixed costs.
Mathematically, the contribution graph is
obtained from the sales graph by a shear, to be
precise , where V are unit variable costs.