What Is Cost-Volume-Profit (CVP) Analysis?
How costs, sales volume and profit are linked, with a worked example.
Home › Accounting Glossary › CVP Analysis
| Key inputs | Selling price, variable cost per unit, fixed costs, volume |
|---|---|
| Key outputs | Break-even point, target profit units, margin of safety |
| Topic | Management accounting · Decision making |
CVP analysis in plain English
CVP answers questions like: “How many units must we sell to break even?” “What happens to profit if we raise the price or cut costs?” It is built on the contribution margin: each unit contributes toward covering fixed costs, and once those are covered the rest is profit.
Worked example
A product sells for 50 with a variable cost of 30. Fixed costs are 20,000.
- Contribution per unit = 50 − 30 = 20.
- Break-even = 20,000 ÷ 20 = 1,000 units.
- If 1,800 units are sold: profit = (20 × 1,800) − 20,000 = 36,000 − 20,000 = 16,000.
- Units for a target profit of 8,000 = (20,000 + 8,000) ÷ 20 = 1,400 units.
- What if the price rises to 55? Contribution = 25, so break-even falls to 20,000 ÷ 25 = 800 units.
- Forgetting CVP’s assumptions: constant price and variable cost per unit, fixed costs that stay fixed, and one product or a constant sales mix.
- Using total cost per unit instead of variable cost per unit.
Frequently asked questions
What is CVP analysis used for?
Finding the break-even point, setting profit targets, testing pricing and cost changes, and assessing risk.
What are the main assumptions of CVP analysis?
Constant selling price and variable cost per unit, fixed costs that stay constant in the relevant range, and a constant sales mix.
How is CVP related to break-even analysis?
Break-even analysis is one application of CVP. CVP also covers target profit and what-if analysis.
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