Examples Of Cost Volume Profit Analysis

Introduction

The Cost Volume Profit analysis also called as " break even " analysis. This is managerial accounting method which is concerned with the effect of product costs and sales volume on operating profit of businesses. This analysis can extend the use of these information which is provided by breakeven analysis. BEP is when TR=TC. The break even analysis is a special example of method of CVP analysis. The break even analysis underlined the relationship between revenue , sales, profit and cost in the short term. This analysis can be useful for managers. They will be able to make short term economic desicions and for educational goals. We can explain it as that the Cost Volume Profit analysis also makes several supposition in

Because in the short run selling price, labour and the cost of materials , usually they are know as with degree of accuracy. But however we can not estimate sales volume, it is not predictable. And profitability often depend upon it in the short run. For example let say one company may know their product 's selling price in this year is going to be in some region of 45$. And variable costs will be about 25$. This company have fixed costs of 150.000$ per year which is more easier to estimate. But what about their profit for that year? Nobody can say that they will be able to get profit for that year. Because there are no enough information. We must know sales volume for the year. But we can work out to know how many sales they need in order to make profit. Here Cost volume profit analysis begins.

The BEP. Method for calculating

As I mentioned in introduction the break even point is TR=TC. Total cost is equal total revenue. It means that there are no profit and no loss. There are 3 methods in the BEP.

1. The equation method

2. Contribution margin method

3. Graphical

Linear Cost volume profit analysis

2. Non-linear cost volume profit analysis

When we talk about Non- linear cost volume profit analysis we should know this used in economics sector. Because it based on economic principles. We can say such as productivity and so on. This is suitable for long term. It is more realistic.

Linear cost volume profit analysis is based on economic principles where costs of input in general not changed in short run. That is why linear cost volume profit analysis is more suitable, practicable and more realistic in short term. If we want to make linear cost volume profit analysis become suitable , ,more realistic in short term, we need 2 things

1. To know 5 assumption in order to do this analysis. These 5 assumption is below:

Selling price is constant. VC per unit is constant, TFC is constant, sale mix is constant, US=UP ( unit sold=unit produce)

2. Second we should review selling price, VC per unit,