1. Cost-Volume-Profit Analysis (CVP analysis), also commonly referred to as Break-Even Analysis, is a way for companies to determine how changes in costs (both variable and fixed) and sales volume affect a company’s profit. With this information, companies can better understand overall performance by looking at how many units must be sold to break even or to reach a certain profit threshold or the margin of safety. It determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including:

• Sales price per unit is constant.

• Variable costs per unit are constant.

• Total fixed costs are constant.

• Everything produced is sold.

• Costs are only affected because activity changes.

• If a company sells more than one product, they are sold in the same mix.

The CVP analysis is very much useful to management as it provides an insight into the effects and inter-relationship of factors, which influence the profits of the firm. The relationship between cost, volume and profit makes up the profit structure of an enterprise. Hence, the CVP relationship becomes essential for budgeting and profit planning.

As a starting point in profit planning, it helps to determine the maximum sales volume to avoid losses, and the sales volume at which the profit goal of the firm will be achieved. As an ultimate objective it helps management to find the most profitable combination of costs and volume.

A dynamic management, therefore, uses CVP analysis to predict and evaluate the implications of its short run decisions about fixed costs, marginal costs, sales volume and selling price for its profit plans on a continuous basis.

It measures changes in the financial health of a company as it relates to sales. A CVP model is a simple financial model that assumes sales volume is the primary cost driver. In order to create a CVP model, you need certain data for the fiscal period in question. You need an estimate or figure for fixed costs, unit-level variable costs, and product/unit sales prices.

The fundamental cost-volume-profit relationship can be derived from profit equation:

Profit = Revenue – Fixed Costs – Variable Costs

Where profit is PR, revenue equals the product of price per unit P and sales volume in units Q, fixed costs FC are constant and total variable costs equal the product of units sold Q and variable cost per unit V, the following equation is a more elaborate representation of CVP relationships:

PR = Q × P - Q × V - FC

This is the most fundamental equation which can be used to work many CVP numbers.

For break-even point, we need to set PR ad 0 and solve for Q and we get:

Break-even Q = FC ÷ (P – V)

It shows that break-even point can be calculated by dividing fixed cost by the contribution margin per unit.

For example, let’s take a movie theater in reference to a simple cost volume profit analysis. The theater has quarterly fixed costs of $30,000. These include utilities, salaries, and rent/mortgage, etc. The variable cost per movie ticket is $2. This includes the cost of paper, printing, and the custodial services, etc. The price of a movie ticket is $7.

Three variables:

1. Fixed costs of $30,000
2. Variable costs of $2
3. Sales price of $7

Now, using this data, we can calculate the breakeven point for the theater. Once you have this data, calculating the breakeven point is easy. First, compute the contribution margin per ticket. The contribution margin is the sales price minus the unit-level variable costs. Then find out how many tickets the theater must sell in order to cover its fixed costs. To do this, divide fixed costs by the contribution margin per ticket.

Companies such as Boeing ,Airbus ,etc use CVP Analysis.

2. 

DATE	PARTICULARS	LF	DEBIT	CREDIT
june 30	Service revenue		5390
	income summary			5390
	(to close revenue account)
june 30	Income summary		3840
	salaries and wages expences			1500
	miscellanious expences			380
	supplies expences			1960
	(to close expences account)
june 30	Income summary		1550
	retained earnings			1550
	(to close net income)
june 30	retained earnings		710
	dividends			710
	(to close dividends)

POST CLOSING TRIAL BALANCE

PARTICULARS	DEBIT	CREDIT
CASH	3620
ACCOUNTS RECEIVABLE	3930
SUPPLIES	480
ACCOUNTS PAYABLE		1500
UNEARNED REVENUE		110
SALARIES PAYABLE		400
COMMON STOCK		4500
RETAINED EARNINGS		1550
TOTAL	8060	8060