cost volume profit analysis

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1.1. Introduction to the concept
The Cost-Volume-Profit(C-V-P) analysis is the analysis of the cost evolution models, which point out the relation between cost, production volume and profit. The C-V-P analysis is a useful forecasting as well as managerial control tool. This analysis technique expresses the relation between income, sales structure, costs, production volume and profits and includes break-even point analysis and profit forecasting procedure. These relations may be used by managers to make short term forecasts, to assess company performance and to analyze decision making alternatives.
Cost volume profit analysis of three variables i.e. cost volume and profit. This analysis measures variation of cost volumes and their impact
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Required Sales

(a) In term Of Values

= Fixed Cost + Required Profit
P/V Ratio

(b) In Term of Unit = Fixed Cost + Required Profit
Contribution per Unit

1.1.4. Profit volume ratio

The profit / volume ratio, better known as contribution / sales ratio (C/S ratio), expresses the relation of contribution to sales.

P/V ratio = Contribution * 100 Sales

P/V ratio = Fixed cost + Profit *100 Sales
1.1.5. Margin of Safety
Margin of safety may be defined as the difference between actual sales and sales at breakeven point.

(a) M/S = Actual Sales – B.E.P

(b) M/S = Profit P/V Ratio
1.1.6. Contribution
Contribution is the difference between sales and the marginal cost of sales. It is also known as contribution margin or gross margin.

Contribution = Sales – Variable cost

Contribution = Fixed cost + Net Profit

Contribution = Fixed cost – Net Loss

Contribution = Sales * P/V Ratio

1.1.7. Contribution per Unit

Contribution per Unit = Sales per Unit – Variable Cost per Unit.
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