Cost Volume Profit (CVP) Analysis

Introduction

Break Even Point Graph

CVP analysis assumes that selling prices and variable costs are constant per unit and that fixed costs are constant in total.

Contribution is the term used to describe the difference between sales revenue and variable costs.  This may be calculated in total, or on a per unit basis using selling prices and variable costs per unit.

The difference between contribution and fixed costs is profit (or loss), thus when contribution equals fixed costs, break-even occurs.  A target profit can be converted into a target contribution to use to calculate the number of units required to achieve the desired target profit.

It is very difficult to use profit in the calculations because if total fixed costs are assumed to be constant, fixed cost per unit, and thus profit per unit is changing every time the activity level changes; whereas contribution per unit is constant.