Cvp Analysis

A cost-volume-profit analysis is a vital factor to a company. It is very important to profit planning. Cost-volume-profit (CVP) analysis is the study of the effects of changes in cost and volume on a company’s profits. It is also a factor in management decisions such as setting selling prices, determining product mix, and maximizing use of production facilities. There are five components that make up a CVP analysis. They are volume or level of activity, unit selling prices, variable cost per unit, total fixed costs, and sales mix. The CVP analysis considers the relationships that each of these components have with each other. A better understanding of what these components are will help set the basis of understanding how the CVP analysis works. The volume or the level of activity is the current condition of the market and the company. It is a snapshot of what the sales look like. It tells if products are moving or if the business is dead in the water. Unit selling prices are the current selling prices of the products at that point of time. The variable costs per unit are the costs that vary in total directly and proportionately with changes in the activity level. The total fixed costs are the totals of the costs that remain the same in total regardless of changes in the activity level. The sales mix is the percentage that each product represents is total sales. An example of how all of these contribute to the CVP analysis will help in seeing how the process works and how it will be useful to a company. In the first example we will see how an increase in unit selling prices will affect the contribution margin. The contribution margin is the amount of revenue remaining after deducting variable costs. Say that XYZ auto parts store sells a particular part for 100 dollars. The variable costs would be say 50 dollars. Both of these are per unit. Take the variable costs per unit and subtract it from the selling price per unit and you get a 50 dollar