Explain the components of cost-volume-profit analysis?

Question

Explain the components of cost-volume-profit analysis?

Answer 1

A few main components of CVP analysis are:

Contribution Margin = the amount remaining from sales revenue after variable expenses have been deducted. It is the amount available to cover fixed expenses and then to provide profit for the period.

This concept is expanded to define the:

Contribution Margin Ratio, which is useful in that the impact of any given dollar change in total sales can be computed by simply applying the CM Ratio to the dollar change.

Break-even computations are used to determine the level of sales at which the company's profit is zero. These computations can also be expanded to find the level of sales needed to reach a desired target profit goal.

Margin of Safety is the excess of budgeted (or actual) sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.