Cost-volume-profit (CVP) analysis explains the impact of changes in selling prices, volume of sales, variable costs, and fixed costs on net profit. It helps determine the effect of changing one factor on the others. Contribution is defined as sales minus variable costs, and is used to calculate break-even point, profit at a given sales level, and sales needed to earn a target profit. The profit-volume (P/V) ratio expresses the relationship between contribution and sales, and is an important indicator of profitability. It is used to calculate break-even point, profit at a given sales level, sales needed for a target profit, and the impact of a price reduction. Margin of safety is

2. Cost –volume-profit analysis
 CVP analysis is defined as ‘the study of
the effects on future profits of changes
in fixed cost ,variable cost, sales price,
quantity and mix’
 An understanding of cvp analysis is
extremely useful to management in
budgeting and profit planning. It explains
the impact of the following on the net
profit:-

3. It explains the Impact of the
following on net profit
 (a) changes in selling prices
 (b) changes in volume of sales
 (c) changes in variable cost
 (d)changes in fixed cost
 In fact ,cvp analysis helps in determining the
probable effect of change in any one of these
factors on the remaining factors.

4. Contribution and marginal cost
equation
 Contribution is the difference between sales
and the marginal(variable) cost of sales. it is
also known as contribution margin or gross
margin.
 Thus contribution is calculated by the
following formula-
 Contribution=sales-variable cost (c=s-v)
 contribution=Fixed cost+profit (c=F+P)
 Contribution=Fixed cost-loss (c=F-L)

5. Profit-volume Ratio(P/V
ratio)
 The P/V Ratio,better Known as
contribution/sales ratio(C/S
ratio),express the relation of
contribution to sales.
 P/V Ratio=contribution/sales =
contribution/sales=s-v/s
 By transposition, we have
1 C=sxp/v ratio
2 s=c/p/v ratio

6. P/V ratio by comparing
 p/v ratio may also be computed by
comparing the change in contribution to
change in sales (or change profit to
change in sales.)any increase in profit
will mean increase in contribution
because fixed costs are assumed to
remain constant at all level of
production.thus-
 p/v ratio=change in contribution/change
insales=change in profit/change in sales

7. USES OF P/V RATIO
 P/V Ratio is one of the most important ratios
to which in business . It is an indicator of the
rate at which profit is being earned . A high
P/v Ratio indicates high profitability and low
ratio indicates low profitability in the business
. The profitability of the different sections of
the business such as sales areas ,classes of
customers, product lines , method of
production etc.may also be compared with
the help of profit-volume ratio. The P/v ratio

8. Cot.
is also used in making the following type of
calculations:
(a) Calculation of break-even point
(b) calculation of profit at a given level of sales .
(c) calculation of the volume of sales required to
earn a given profit.
(d) calculation of profit when margin of safety is
given .
(e) calculation of the volume of sales required to
maintain the present level of profit, if selling
price is reduced.

9. BREAK-EVEN POINT
 The break-even point is the volume of
output or sales at which total cost is
exactly equal to sales. it is the point of
no profit no loss. this is the minimum
point of production at which total cost is
recovered and after this point profit
begins.

10. Formula of BEP
 BEP(in units)=total fixed
cost/contribution per unit=F/S-V
 BEP(in rupees)= total fixed cost /
contribution x sales =FXS/S-V
OR BEP(in rs.)=total fixed cost/p/v
ratio

11. Margin of safety (M/S)
 Margin of safety may be defined as the
difference between actual sales & sales
at break even point: in other words ,it is
the amount by which actual volume of
sales exceeds the break-even point
.margin of safety may be expressed in
absolute money terms or as percentage
of sales.
 M/S=actual sales-break-even point

12. References
 Accounting for Managers by Dr. Sakshi Vasudeva Galgotia
Publishing Company Chapter 21 Marginal Costing and
Decision Making page no. 697
 Cost Accounting by S.P jain K.L Naran Part 5 Chapter 2
Cost Volume Analysis page no. 2.1

13. Thank you