Part 2 – Equations
Now, that I have introduced the basics of Cost Volume Profit Analysis, at Part 1. I’m going to introduce you to a new level the equation, the graphs, mainly what mathematician likes at an accounting topic. I’m going to introduced you to the meaning of each word in the equation first, so you wouldn’t be confuse of what am I saying in the formulas.
Elements of CVP
- Fixed Costs ; “FC”
- Variable Costs; “VC”
- Number of units sold; “X”
- Selling price per unit; “S”
- Expectation profit; “P”
- Break-even Units; “BU”
- Total Revenue; “TR”
- Total Variable Cost; “TVC”
- Total Contribution Margin; “TCM”
- Contribution Margin Per UNIT; “CMP”
- Sale Unit; “SU”
- Expect Profit “EP”
- Variable cost per unit of contribution margin; “VCCM”
This are the words that would be in the equation that will solve the contribution Margin and Break-Even analysis of your Business.
I Introduced contribution margin first, because CM “contribution margin are included in break even analysis so you would understand where I get the contribution margin first than the break even analysis.
Contribution margin is the comparison of the profitability of different services or product your business or my business are offered
Formulas of Contribution margin
To find out your Total Contribution Margin.
The formula is: TR – TVC = TCM
Or in much detail Total Revenue
To find out your Contribution margin per unit.
The formula is: S * VC = CMP
Or in much detail Selling Price per unit subtracted to cost per unit resulting to contribution margin per unit.
- Break-even contribution margin must be equivalent to the fixed cost.
- Contribution must cover a business fixed cost or not your business would be making a big loss.
Break Even Analysis
A break-even analysis in point of view is where the net income would be zero. In my point of view break even point , it is like gravity no matter how high you will get you will come down, like break even it will always be zero.
Formulas of break even point
To find out your break- even point in units or “S”.
The formula is: FC / (“S” * “VC) = Break even point in units
Or in much detail Selling price multiply to variable cost then divide it to fixed Cost would you get your answer of getting the break Even point in units.
To find out your break- even point in numbers or “X”.
The formula is: S * BU
Or in much detail, Break-even units times by Selling price will get your results in Numbers or dollars.
To find out your sale (unit)
The formula is: ( FC + EP) / ( SP – VCCM) = SU
Or in much detail, fixed cost addition to expect profit , then divide it to the result of selling price per unit subtracting to variable cost per unit of contribution margin resulting to your sale unit.
Visual of break even point
This is a video of break even analysis in more in a visual understanding , that can help you to understand much more better, because this help me understand much better. My explanation are words, but visual effect would make it for you to understand much clearer.
Hints for Break even Point
You gotta lower your break even to gain faster profit, by this type of things increasing your selling price, reducing your fixed cost or variable cost. This ways can get your business running faster.
increase Break even, in my opinion increasing break even would not make your business much better, you wouldn’t get a lot of revenue and your income would not be successful than before.
Why is graph important at break even point, it shows where your business would be making. This are example of graph that can get your head much clearer on , the situation and what are the results for to be put on the graph and see where your business is progressing or not going good.
In smaller Numbers
In bigger numbers.
This is my overall explanation of cost volume profit analysis, I hope you can understand what I am saying.