Break Even Analysis,

Contribution Sales ratio key

factor, Marginal Safety,
Indifference Point
 Cost Volume Profit Analysis
Determination of profits depends upon the interplay
between the following factors:

• Selling Price per unit and total sales amount

• Total cost

• Volume of sales

CVP analysis aims at studying the relationship between these

factors and their impact on the amount of profits.
What is Contribution?
Sales to Contribution Ratio
It expresses the relation of contribution to sales and can be
expressed as under:
P/V Ratio = Contribution/Sales
• The P/V ratio is important for studying the profitability of
operations of a business. It reveals the effect on profit of
changes in the volume.
• A high P/V ratio indicates high profitability.
• At all levels of output, PV Ratio will remain constant.
• Application of PV Ratio:
-Determination of Break even point.
-Helps ascertain Margin of Safety.
-Determination of Profit,Sales Volume and Selling Price per
unit.

• Ways to improve PV Ratio:

-Increase in sale prices.
-Reduction in variable price
-Increase in sales turnover.
 Break Even Analysis

• It is a point of no profit,
no loss
• It is calculated in terms
of units or value
• BEP = Fixed Cost
Contribution p.u
Application of Break Even Analysis
• Calculation of profit at different sales volumes
• Calculation of sales for desired profit
• Required sales = Fixed Cost + Desired Profit
PV Ratio
Importance In Management Decisions
• Decision regarding Any Option
• Decision regarding Optimum Product- mix
• Decision regarding Pricing
• Decision regarding Make or Buy
• Cost Control
 Margin of safety
• Actual sales – break even point sales
• Linkage to profits
• Margin of safety and prices
• How to improve it?
• Significance
i. Cushion in business cycle
ii. Ensures survival of business during depression
iii. Stability to firm
 Indifference Point
• The indifference point is the level of volume at which total
costs, and hence profits, are the same under both cost
structures.

• APPLICATIONS
– Outsourcing decisions
– Quality Improvement decisions
– different marketing plans decisions
– production plans or methods decisions
• Production Method A = Fixed Rs 40,000; Variable cost per unit
Rs 7
• Production Method B = Fixed cost Rs 95,000; Variable cost per
unit Rs 4
• Selling price for both production methods Rs 10 per unit

Total Cost for Production A = Total Cost for Production B

Fixed cost + variable cost = Fixed cost + variable cost
Rs 40,000 + Rs 7 Q = Rs 95,000 + Rs 4Q
Rs 3Q = Rs 55,000
Q = 18,333 units (rounded)

• At volumes below 18,333 units, production A gives lower total

costs (and higher profits); above 18,333 units, production B
gives higher profits.