CVP ANALYSIS

Contribution margin – meaning

Contribution margin - meaning meaning of contribution margin

The contribution is the difference between the selling price and variable cost (or marginal cost) is known as `contribution’ or `gross margin’. It may be considered as some sort of fund from out of which all fixed costs are met. The difference between contribution and fixed cost represents either profit or loss, as the case may be.

The contribution is calculated using the following formula:

Contribution = Selling Price – Variable Cost= Fixed Cost + Profit Or – Loss read more

Meaning of Cost-Volume-Profit Analysis

Meaning of Cost-Volume-Profit Analysis

Cost-volume-profit (CVP) analysis focuses on the way cost and profit change when volume changes. It is, broadly speaking, that system of analysis which determines the probable profit at any level of activity. This technique is generally used to analyze the incremental effect of volume on costs, revenues, and profits. At what volume of operations are costs and revenues equal? What volume of output or sales would be necessary to earn a profit of saying TZS 1000,000? How much profit will be earned at a volume of, say 10,000 units? What will happen if there is a reduction of 10 percent in the selling price? Questions like these are sought to be answered through CVP analysis. This detailed analysis will help the management to know the profit levels at different activity levels of production and sales and various types of costs involved in it. read more

6 advantages of break-even analysis.

6 advantages of break-even analysis.

A business is said to break even when its total sales are equal to its total costs. A break-even point is that volume of sales or production where there is no profit and no loss. At this point, the contribution is just equal to fixed expenses. If production is enhanced beyond this level, profit shall accrue to the management and if it is decreased from this level, the loss shall be suffered by the organization. read more

Significance of profit-volume (PV) ratio

significance of profit volume ratio

The profit volume ratio or P/V ratio is the ratio or percentage of contribution margin to sales. This ratio is also known as marginal income ratio, contribution to sales ratio or variable profit ratio. The profit volume ratio usually expressed in percentage is the rate at which profit increases with the increase in the volume. read more