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BENEFITS OF DOCUMENT
Managers must make decisions about sales volume, pricing and costs and are concerned about the impact of their decisions on profit. Therefore, they need to understand the relations among revenues, costs, volume and profit. Cost-volume-profit, or CVP, analysis provides managers with information for decision making.
What is CVP?
CVP analysis explores the relationship between sales revenue, cost and their effect on profits. CVP analysis is also known as Break-even analysis.
Contribution margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. CM goes to cover fixed expenses.
Basically CM is the difference between price and variable cost. It is what is leftover to cover fixed costs and then add to operating profit.
Contribution Margin Ratio
The contribution margin ratio is the contribution margin as a percentage of sales revenue.
Contribution Margin Ratio
Break Even Analysis
The break-even point can be defined as:
the level of activity at which a business makes neither a profit nor loss.
the point where total sales revenue equals total expenses (variable and fixed)
the point where total contribution margin equals total fixed expenses.
In summary, at break-even target profit is zero. Therefore, break-even sales volume in units equals fixed costs divided by unit contribution margin and break-even sales volume in dollars equals fixed costs divided by contribution margin ratio.
Target Profit Analysis
In addition to calculating the break-even level of sales, a company can set itself a target to achieve a certain level of profits.
Margin of Safety
Margin of safety is the excess of budgeted or actual sales revenue over break-even revenue.
Expressed as a % of Budgeted Sales Value or in units above break-even level.
In other words, the margin of safety indicates the risk of losing money that a company faces.
How much can sales decrease in either volume or revenue before the company experiences a net loss?
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Source: Best Practices in Break Even Analysis Excel: Break Even Analysis Excel (XLSX) Spreadsheet, Big4WallStreet
ABOUT THE AUTHOR: BIG4WALLSTREET
We help small and midsize businesses' leaders with their strategic problems by creating or improving financial models, implementing tools to drive efficiency, performance, and better decision making.
With over a decade of experience in Financial & Business Modeling / Planning, Performance & Analysis, we have developed strong business understanding across diverse industries (Energy, Shipping, Manufacturing, Retail, Oil & Gas, Infrastructure, Food & Beverages, Agriculture, Healthcare, Telecoms, Real Estate, Construction & Hospitality), as well as strong capabilities across a range of financial modeling solutions.
We are one of the few financial modelers to be certified from both the Corporate Finance Institute (Financial Modeling & Valuation Analyst, Business Intelligence and Data Analyst), and the Financial Modeling Institute (Advanced Financial Modeler, Certified Financial Modeler). We build integrity and trust by providing high-quality tailor-made solutions to our clients.
Furthermore all these models can be tailor made upon your request in order to meet any special requirements for your projects should you not find something that suits you.
Big4WallStreet has published 41 additional documents on Flevy.
This business document is categorized under the function(s): Financial Model
It applies to All Industries
File Size: 1.2 MB
Related Topic(s): Break Even Analysis
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Initial upload date (first version): Jan 11, 2023
Most recent version published: Jan 11, 2023
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