Important CVP Formulas
Total Cost = Fixed Costs &add; Variable CostsOperating Income = Revenue − Variable Costs − Fixed Costs
Contribution Margin = Selling Price − Variable Costs
Contribution Margin Ratio = Contribution Margin per Unit / Unit Sales Price
Target Unit Sales = (Fixed Costs + Target Income) / Contribution Margin per Unit
Target Total Sales = (Fixed Costs + Target Income) / Contribution Margin Ratio
Break-even = Fixed Costs / Contribution Margin
Margin of Safety = Actual Sales Volume − Break-even Sales
Importance of understanding the CVP analysis
• Can be used to determine the break-even point where a company cannot incur loses or obtain profits.
• Can be used to determine the number of units of products or services needed for a specific target profit.
• Can be used to determine important decisions such as which product line should be dropped in tight economic times.
• Can be used to determine which subsidiary companies are more profitable than the others.
Note: There are a number of various uses of the CVP analysis, and it is important to stress that understanding this concepts and calculations forms the basis of making important decisions in company.