# Profit Planning: Cost-Volume-Profit Analysis

Companies must earn profit to continue it's operation and to stay in business. The managers want to increase profitability and need to predict what actions will affect profits. What factors beside beside sales determine a company's profit performance?

## Manager's Decision

Managers are concerned with maximazing profits and may consider the following questions: "How many units we must sell to earn \$100,000?" "What selling price should we set?" "Should we hire more salesperson?" "Would extending longer hours each day be profitable?" Application of Cost-Volume-Profit analysis may help to resolve this issues?

## Cost-Volume-Profit Analysis

Cost-Volume-Profit analysis may help the manager with plan for change. CVP is a method of analyzing relationship among cost, volume and profits. This is the same thing as break-even analysis and profit volume analysis.

We can use the same general relationship to find both break-even point and volume required to earn target profit. Profit equals total sales minus total variable cost minus total fixed cost.

Profit = total sales usd - total variable cost - total fixed costs

## Cost

Cost is classified as either fixed or variable according to amount of cost changes as activity changes. Cost do not come labeled as to fixed cost or variable cost. You must identify difference between two types of cost:

Variable Cost changed in direct proportion to changes in volume.

On the other hand, Fixed Cost remain the same in totalover a wide range of volume.

## Contribution Margin

Contribution Margin is a difference between selling price per unit and variable cost per unit. In some cases, expressing contribution margin in percentage is useful. The contribution margin percentage is per unit contribution margin vivided by selling price in total sales in dollars. Both calculations give same result.

Understanding the relationships in this profit equation allows to to solve any CVP problems. We can restate the formula as:

Profit = (unit selling price x Qty sold) - (unit variable cost x Qty sold) - total fixed cost

Knowing the selling price minus variable cost per unit equals contribution margin per unit, we can combine those two components. We can add fixed cost to both sides and we get:

Contribution margin per unit x Qty sold = Profit + total fixed cost

### Meet the author Selriel
An accountant who is fond of writing poems.
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