University Taster

Accounting – University Taster

  1. 1. Prerequisites
  2. 2. Introduction to Accounting
  3. 3. Financial Accounting
  4. 4. Management Accounting Basics
  5. 5. Management Accounting Applications
  6. 6. Next Steps
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Cost-Volume-Profit (CVP) Analysis examines the relationship between a business's costs (both fixed and variable), sales volume, revenue, and profit. It focuses on how changes in these factors influence a company’s ability to achieve its financial goals. It's essentially an extension of the Break-Even Analysis that we covered in the previous lesson.

Contribution Margin

It might help to familiarise yourself with the types of costs before going over contribution. Contribution is the difference between sales revenue and variable costs. It represents the amount available to cover fixed costs and generate profit.

\(\text{Contribution Margin per Unit}=\text{Selling Price per Unit}-\text{Variable Cost per Unit}\)

Equation 5. The Contribution Margin per Unit Formula, where Selling Price per Unit is the price at which each unit is sold and Variable Cost per Unit includes costs that change with production. There are no specific units.

The contribution margin per unit is used in the calculation of another important variable, the CVP:

\(\text{Profit}=(\text{Sales Volume}\times\text{Contribution Margin per Unit})-\text{Fixed Costs}\)

Equation 6. The Profit formula, where sales volume is the number of units sold, contribution margin per unit is the profit per unit after covering variable costs (Selling Price - Variable Cost). Fixed Costs are expenses that remain constant regardless of production (e.g., rent, salaries). The Units are £.

This formula allows managers to predict profits at various levels of sales and to assess the impact of changes in costs or pricing.

The Break-Even analysis formula can be written with Contribution Margin, since we know that Contribution Margin = Selling Price - Variable Cost:

\(\text{Break-Even Point\ (in Units)}=\frac{\text{Fixed Costs}}{\text{Contribution Margin per Unit}}\)

Equation 7. The Break-Even Point formula, where fixed costs are expenses that remain constant regardless of production, contribution margin per unit is the profit per unit after covering variable costs.

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