What are the basic components of cost volume profit analysis?5 Main Elements of Cost-Volume-Profit Analysis.
Profitability of a business can be impacted by changes in product margins, prices, and unit volumes.It is a fundamental financial analysis tool that can be used to determine the breakeven point.The components of the analysis are listed.
The price is per unit.The gross price is the average price per unit sold, including any sales discounts and allowances.Changes in the mix of products and services can cause the price per unit to change substantially from period to period.
There is a variable cost per unit.The variable cost per unit sold is the amount of direct materials and the sales commission associated with a unit sale.Fixed costs are the expenses that do not vary with sales volume.
The total cost was fixed.This is the fixed cost of the business.Unless there is a step cost transition where management has elected to incur an entirely new cost in response to a change in activity level, this figure tends to be relatively steady from period to period.
A variety of ways can be used to arrive at different types of analysis.For example:
What is the breakeven unit volume of a business?The company's fixed cost is divided by its contribution margin per unit.The contribution margin is sales minus variable expenses.If a business has $50,000 of fixed costs per month and the average contribution margin is $50, then the necessary unit volume to reach a breakeven sales level is 1,000 units.
What unit price is needed to make money?We add the target profit level to the total fixed cost of the company and divide by its contribution margin per unit.If the CEO of the business wants to earn $20,000 per month, we add that amount to the $50,000 of fixed costs, and divide by the average contribution margin of $50 to arrive at a required unit sales level of 1,400 units.
What sales are needed to maintain profits if I add a fixed cost?The target profit level and original fixed cost of the business are added to the unit contribution margin.The company is adding $10,000 of fixed costs per month.We add that to the baseline $70,000 fixed costs and profit from the last example and divide by the $50 average contribution margin to arrive at a new required sales level of 1,600 units per month.
The various components of CVP analysis can be used to model the financial results.