3.2 The assumptions underlying the CVP analysis * Costs can be accurately divided into their fixed and variable elements * Unit variable cost and selling price are constant * Fixed costs incurred during the period are charged as expenses for that period * Volume is the only factor that will effect the costs and revenues * Single product is sold or multi-products are sold in accordance with pre-determined sales mix * Efficiency and productivity will not change
3.3 The approaches * Mathematical approach
- The formulae are developed from the following formula:
Net profit=Sales revenue –Total costs
- Break-even point (BEP) is the point of sales volume where the firm is not attaining any profit or loss.
* Contribution approach
- Contribution margin is the excess of total revenues over total variable costs.
Unit contribution marginUCM=Selling price-Unit variable costs
* Contribution can be also be expressed as a ratio to