CVP Analysis and Break-Even Calculation

Study Notes

The cost-volume-profit (CVP) graph helps visualize the relationship between costs, volume, and profit.
Plot fixed expenses as a horizontal line, which remains constant regardless of sales volume.
Plot total expenses as a line starting at the fixed expense level and increasing with sales volume.
The total expense line has a steeper slope due to variable costs.
Plot total sales as a line starting at the origin and increasing with sales volume.
The point where the total sales line intersects with the total expense line represents the break-even point.

The break-even point is the level of sales where total revenue equals total expenses, resulting in zero profit.
It can be calculated using the formula: Break-even point in units = Fixed Expenses / (Sales Price per Unit - Variable Expenses per Unit)

Incremental analysis focuses on the financial impact of changes, such as increasing advertising expenses or changing variable costs.
It helps determine the profitability of a specific action by comparing the incremental costs and benefits.

Contribution margin is the difference between sales revenue and variable expenses.
It represents the amount of money available to cover fixed expenses and contribute to profit.
Contribution margin can be calculated per unit or in total.

The variable expense ratio is the percentage of sales revenue that goes towards variable expenses.
It can be calculated by dividing total variable expenses by total sales.
A lower variable expense ratio indicates a higher contribution margin, which is generally more favorable.

Increasing advertising expenses increases fixed costs and may decrease profit if the sales increase is not substantial enough to cover the added expense.
Increasing variable costs may improve product quality or appeal to customers, potentially leading to increased sales and higher profits.
Decreasing selling price can increase sales volume but may decrease profitability if the price reduction is too significant.

An increase in sales volume generally leads to increased contribution margin and profits, assuming fixed costs remain constant.
A decrease in fixed costs reduces the required contribution margin to break even, potentially increasing profit if sales volume remains the same.
A decrease in variable costs increases the contribution margin per unit, leading to higher profits, assuming sales volume remains the same.
An increase in selling price increases contribution margin per unit, assuming sales volume remains the same.