what is cost volume profit cvp analysis 
cost volume profit cvp analysis is a method of cost accounting that looks at the impact that varying levels of costs and volume have on operating profit investopedia daniel fishelunderstanding cost volume profit cvp analysisthe cost volume profit analysis also commonly known as breakeven analysis looks to determine the breakeven point for different sales volumes and cost structures plotted on a profit volume chart which can be useful for managers making short term business decisions cvp analysis makes several assumptions including that the sales price fixed and variable costs per unit are constant running a cvp analysis involves using several equations for price cost and other variables which it then plots out on an economic graph the cvp formula can also calculate the breakeven point the breakeven point is the number of units that need to be sold or the amount of sales revenue that has to be generated in order to cover the costs required to make the product the cvp breakeven sales volume formula is breakeven sales volume f c c m where f c fixed costs c m contribution margin sales variable costs begin aligned text breakeven sales volume frac fc cm textbf where fc text fixed costs cm text contribution margin text sales text variable costs end aligned breakeven sales volume cmfc where fc fixed costscm contribution margin sales variable costs to use the above formula to find a company s target sales volume simply add a target profit amount per unit to the fixed cost component of the formula this allows you to solve for the target volume based on the assumptions used in the model cvp analysis also manages product contribution margin the contribution margin is the difference between total sales and total variable costs for a business to be profitable the contribution margin must exceed total fixed costs the contribution margin may also be calculated per unit the unit contribution margin is simply the remainder after the unit variable cost is subtracted from the unit sales price the contribution margin ratio is determined by dividing the contribution margin by total sales the contribution margin is used to determine the breakeven point of sales by dividing the total fixed costs by the contribution margin ratio the breakeven point of sales in terms of total dollars may be calculated for example a company with 100 000 of fixed costs and a contribution margin of 40 must earn revenue of 250 000 to break even profit may be added to the fixed costs to perform cvp analysis on the desired outcome for example if the previous company desired a profit of 50 000 the necessary total sales revenue is found by dividing 150 000 the sum of fixed costs and desired profit by the contribution margin of 40 this example yields a required sales revenue of 375 000 special considerationscvp analysis is only reliable if costs are fixed within a specified production level all units produced are assumed to be sold and all fixed costs must be stable in cvp analysis another assumption is all changes in expenses occur because of changes in activity level semi variable expenses must be split between expense classifications using the high low method scatter plot or statistical regression 