Applications of Cost-Volume Profit (CVP) Analysis

Written by True Tamplin, BSc, CEPF®

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.


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


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?

CVP Solution

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

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.