**Summary:**

- CVP analysis helps to determine the impact of
and*cost*on*volume**profit* - Used for many purposes:
- Analysis of impact of cost/volume on profit
- Calculating
in terms of sales revenue or in terms of sales units, for single product or multiproducts.*breakeven point (BEP),*

- In
, the requirement for which the CVP analysis is made is specified*CPA Canada cases* - Once the requirement is specified then the calculation process is initiated.
- For
CVP, the following*calculating*:*information is used*

- Sales price (SP)
- Variable cost (VC)
- Contribution margin (CM) (= SP – VC)
- Fixed cost (FC)
- Target Profit

**CVP**

CVP analysis is tested often in CPA Canada cases and exams. It’s part of Management Accounting (MA) competency, which is tested in-depth in Core 2, Performance Management (PM), Finance and the CFE.

CVP analysis helps to determine the impact of ** cost **and

**on**

*volume***It helps managers understand how the**

*profit.***changes, based on changes in other variables, such as selling price, variable cost, and fixed costs.**

*profit*CVP is an umbrella topic that includes several different calculations. The most commonly tested are:

analysis*Contribution margin (CM)*analysis.*Break-even point (BEP)*

**Contribution Margin (CM) analysis**

CM analysis is used to determine the ** profitability **of a product, before considering any fixed costs. The best way to understand CM is through the profit equation of MA:

**Selling price (SP) – Variable Costs (VC) – Fixed Costs (FX) per unit = Profit**

The above formula is ** per unit**. To calculate for

**, the formula is:**

*total***(Selling price (SP) – Variable Costs (VC)) x Qty of Units – Fixed Costs (FX) = Profit**

CM is the result of deducting VC from the SP. The formula for CM is:

**Selling price (SP) – Variable Costs (VC) = Contribution Margin (CM).**

In CPA cases, you’ll be provided with either ** total **amounts or

**amounts. Put these numbers in Excel, apply the above formula, and calculate the CM.**

*per unit*The most common AOs that will test you on CM are:

- New product launch
- Outsource decision (known as Make or Buy)
- Keep or add or drop (product, service, department, customer)
- Special order
- Cost-benefit analysis

**Break-even point (BEP) analysis**

BEP analysis can be done for a single product or multiple products. I’ll discuss both below:

**BEP for single product**

BEP determines the number of ** units**, or the

**, at which point the profit is 0. The formula for BEP is**

*selling price***is:**

*terms of units***BEP in units = (Fixed Cost + Target profit (if any)) / CM per unit**

Formula for BEP is ** terms of selling price **is:

**BEP in selling dollars = (Fixed Cost + Target profit (if any) + Variable Costs x Qty) / Qty **

In CPA Canada eBook, the formula uses the term “contribution margin ratio” and the formula is Fixed costs / CM ratio, however I find the broken-out formula I put above easier to understand.

**BEP for multiple products**

Similar to above, we’re trying to determine the number of ** units**, or the

**, at which point the profit is 0. Since there are now multiple products, the formula changes.**

*selling price***BEP in units = (Fixed Cost + Target profit (if any)) / Weighted Average CM (WACM) per unit**

The WACM is calculated using the **sales mix**. The sales mix tells you the % of each product that is normally sold at the company. CPA cases usually give this number. If it’s not provided, calculate using the sales (revenue) figures for each product.

**BEP in selling dollars = (Fixed Cost + Target profit (if any) + Total Variable Costs x Qty) / Qty **

**Exam focus**

Here are some ways you are tested on CPA exams:

- (1) The FC and target profit (if any) will be given in CPA cases in most cases while you may be asked to calculate SP, CM, WACM etc.
- (2) The exam might complicate the FC and say “fixed cost will increase if the sales activity exceeds this limit.” In this case, you have to provide two calculations, first for the sales activity below the limit and second for above the limit.
- (3) The sales may be fixed. In this case, you will need to treat the sales like fixed costs. This testing scenario is covered in my Core 2 case pack.