Question

What are CVP relationships and why is the break-even point important to these relationships, also what factors must be considered in determining a break-even point, and What type of events affect a break-even point?

Answer 1

In order to understand the relationship between cost , volume and profit we use Break Even Point Analysis(BEP). BEP technique focuses on how selling price, sales volume , variable costs , fixed costs and the mix of the products effects profit.

Break Even Point (in units)= Fixed costs/ contribution per unit.

Break Even Point (in $). = fixed costs / PV ratio

This is the level of sales at which the company neither incurs profit nor losses, ie all costs incurred are equal to sales .

To calculate BEP, we need to calculate PV ratio or contribution margin ratio. Ie contribution divided by sales .

Types of events affecting BEP:

1. market demand ie it effects sales volume

2. START UP costs

3. Classification of variable and fixed costs.

4. Pricing strategies .