Cost-Volume-Profit relationship Cost-Volume-profit (CVP) analysis is a powerful tool that helps managers understand the relationships among cost,

volume, and profit. This relationship analysis is based on the 5 key factors that could affect profit . 1. 2. 3. 4. 5. Selling prices Sales volume Unit variable cost Total fixed costs Mix of products sold The selling price is determined by the market clearing price (Economics) in a free marker society. Sales volume: is determined by consumers demand in a market society. Unit Variable costing= Variable cost/Unit. (variable costing are costs that vary with output) Ex. The more amount of gum you buy for $1.50 the more the cost is. This is because the variable unit cost is $1.50, and additional gum is going to add to your total price. Total Fixed Costs: Are the costs that are going to be incurred in a business even when the business produces no product or sell services. Some example of fixed prices include rent, utilities, advertisement costs, etc. Mix of Products sold: results from a products costs that has both variable and fixed costs. We can describe this relationship with an algebraic expression such as Y=Mx+B Y: is the mixed costs, M: is the variable unit price, and B is the fixed cost. So a mixed cost product would be the combination of both unit variable prices multiplied by quantity and mixed costs. In order to properly show the variable cost and fixed costs in an income statement we would use a contribution income statement. A contribution income statement would show us the variable and fixed costs instead of grouping them in expenses.

The contribution format will be able best to be described in an equation Profit= (Sales-Variable expenses)-fixed expenses The reason to know the cost-volume-profit relationship is because variation in cost or volume is going to affect the amount of profit we receive. Because of this in order for managers to guarantee their fixed costs are going to be covered is by going through a break even analysis. Break-even Break-unit defines the amount of products or services that a business would have to get in order to cover all fixed costs and end up at a normal profit of $0. To figure out the amount of product or services that a business needs to have to break even we can use the contribution format equation. Our desired profit would be $0 which means we would break even and end up at a normal profit. $0= (sales-Variable Expenses)-fixed costs This equation could also be used in order to figure out a desired profit as well. If as a business your desired goal is to gain a set amount of profit the first year, you can plan for the amount of quantity and services you would have to provide in order to meet this goal. Profit= (sales-variable expenses)-fixed costs This cost-volume-profit relationship can help a manager and a business owner budget in order to get to the desired profit. For this reason a business owner would have to verify the variable and fixed costs of a business in order to plug it into the equation. Personal Connection: What are some variable costs that you would have to experience in college? What are some fixed costs that you would have to account for in college? How could going to college yield a profit? (Hint: would you be able to earn more by going to school) *Use desired college to get to fixed and variable costs. Blog Question: Have you ever thought about college? What do you want to go to school for and why? (What major would you study?) Research: How much more money does a person with a bachelor get in comparison to someone with a high school diploma. How much more does someone with a higher education get in comparison to someone with a bachelor degree?