COST-VOLUME-PROFIT ANALYSIS Once a company determines its fixed and variable costs, it can then conduct cost-volume-profit analysis. Basically, CVP analysis explores the relati among costs, volume or activity levels, and profit 1. Break-Even Point One of the primary uses of CVP analysis is to calculate the break-even point. The break-even-point is the number of units a company must sell to earn a zero profit (i.e, break-even). At the point where sales revenue equals total costs(composed of fixed and variable cost) the company 2. Profit Equation The calculation of the break-even point relies on the following profit equation Profit=SP(x)-VC(x)-TFC where X=Quantity of units produ SP=Selling price per unit VC=Variable costs per unit TFC=Total fixed costs As stated in the equation, profit is equal to revenues( selling price pe unit times quantity) minus variable costs( variable costs per unit times quantity) minus total fixed costs. To calculate the break-even point, simply set profit to zero, insert the appropriate selling price, variable costs, and fixed costs and solve for the quantity(x) Suppose AA Company sells its deluxe in-line skates for $150 per unit(a 6). Variable costs are estimated to be $100 per fixed costs are estimated to be $100000 per month. How many units must AA sell to break even in a given month? To answer the question, solve the equation above for a particular value of X 0=$l50(x)$100Xx)-$100000 0=$50(x)$100000 x=2000 Solving for x yields a break-even quantity of 2 000 pair of skates. If management prefers the break-even quantity expressed in dollars of sales, rather than in units, the quantity is simply multiplied by the selling price of $150 eld$300000 3. Margin of safetyCOST—VOLUME—PROFIT ANALYSIS Once a company determines its fixed and variable costs ,it can then conduct cost -volume-profit analysis .Basically，CVP analysis explores the relationships among costs，vo1ume or activity 1evels，and profit． 1．Break-Even Point One of the primary uses of CVP analysis is to calculate the break—even point．The break-even-point is the number of units a company must sell to earn a zero profit (i.e.，break-even)． At the point where sales revenue equals total costs (composed of fixed and variable cost) the company “breaks even”. 2．Profit Equation The calculation of the break-even point relies on the following profit equation： Profit=SP(x)-VC(x)-TFC where X=Quantity of units produced and sold SP = Selling price per unit VC=Variable costs per unit TFC=Total fixed costs As stated in the equation， profit is equal to revenues(selling price per unit times quantity) minus variable costs (variable costs per unit times quantity) minus total fixed costs．To calculate the break-even point，simply set profit to zero ,insert the appropriate selling price，variable costs，and fixed costs and solve for the quantity(x)． Suppose AA Company sells its deluxe in-1ine skates for $150 per unit(a pair of skates)．Variable costs are estimated to be $100 per unit，and total fixed costs are estimated to be $100000 per month．How many units must AA sell to break even in a given month? To answer the question, solve the equation above for a particular value of X． 0=$150(x)一$100(x) 一$100 000 0=$50(x)一$100 000 $50(x)=$100 000 x=2 000 Solving for x yields a break-even quantity of 2 000 pair of skates．If management prefers the break-even quantity expressed in dollars of sales，rather than in units，the quantity is simply multiplied by the selling price of $ 150 to yield $300 000． 3．Margin of safety