# Applications of Cost-Volume Profit (CVP) Analysis ### Reviewed by Subject Matter Experts

Updated on March 02, 2023

Managers find information concerning cost-volume-profit (CVP) relationships useful because it helps in various planning decisions. Managers use this analytical technique to achieve far more than simply identifying break-even points.

## Example

The following problems are based on the information given for Company X:

• Sales price (SP) per unit = \$25
• Variable cost per unit = \$15
• Fixed costs for related time period = \$30,000
• Total sales made by Company X = \$100,000

1. A 10% reduction in selling price per unit

## Solution

New SP per unit = 25 - (25 x 10%) = \$22.50

New contribution margin per unit = 22.50 - 15 = \$7.50

With fixed costs remaining unchanged, the new break-even point is 30,000 / 7.5 = 4,000 units.

The management may find the proposed changes desirable if, in the long run, sales are expected to increase.

2. The management believes that with a 10% reduction in selling price per unit, demand is expected to increase by 25%. What effect would this change have on profits? Is this a viable proposition?

With a reduction in sales price per unit and an increase in sales by 25%, the relevant calculations are shown below:

• New SP per unit = \$22.50
• Sales = 5,000 units

### A Different Situation

Consider the following situation:

• Sales (5,000 @ 22.50) = \$112,500
• Variable costs (5,000 @ 15) = 75,000
• Contribution margin = 37,500
• Fixed costs = 30,000
• Net profit = 7,500
• BE point = 4,000 units
• BE sales revenue = 90,000
• P/V ratio = 33.33%
• MOS ratio = 20%

The proposed change is not desirable. This is because net profits have decreased by \$2,500. Also, the break-even point has increased to 4,000 units and both the P/V ratio and MOS ratio have fallen.

These examples serve to show that CVP analysis is helpful to solve various business problems. It is a powerful tool to use in conjunction with variable costing in order to improve the decision-making process.

## Applications of Cost-Volume Profit (CVP) Analysis FAQs 