Cost Volume Profit (CVP) Relationship in Graphic Form:

Learning Objectives:

1. Prepare a CVP graph or breakeven chart.

The relationships among revenue, cost, profit and volume can be expressed graphically by preparing a cost-volume-profit (CVP) graph or break even chart. A CVP graph highlights CVP relationships over wide ranges of activity and can give managers a perspective that can be obtained in no other way.

Preparing a CVP Graph or Break-Even Chart:

In a CVP graph some times called a break even chart unit volume is commonly represented on the horizontal (X) axis and dollars on the vertical (Y) axis. Preparing a CVP graph involves three steps.

1. Draw a line parallel to the volume axis to present total fixed expenses. For example we assume total fixed expenses $35,000.

2. Choose some volume of sales and plot the point representing total expenses (fixed and variable) at the activity level you have selected. For example we select a level of 600 units. Total expenses at that activity level is as follows:

After the point has been plotted, draw a line through it back to the point where the fixed expenses line intersects the dollars axis.

3. Again choose some volume of sales and plot the point representing total sales dollars at the activity level you have selected. For example we have chosen a volume of 600 units. sales at this activity level are $150,000 (600units × $250) draw a line through this point back to the origin. The break even point is where the total revenue and total expense lines cross. See the graph and note that break even point is at 350 units. It means when the company sells 350 units the profit is zero. When the sales are below the break even the company suffers a loss. When sales are above the break even point, the company earns a profit and the size of the profit increases as sales increase.

You may also be interested in other relevant articles:

• Contribution Margin and Basics of CVP Analysis
• Difference Between Gross Margin and Contribution Margin
• Cost volume profit (CVP) relationship in graphic form
• Contribution margin ratio (CM ratio)
• Importance of the contribution margin
• CVP consideration in choosing a cost structure
• Operating leverage--degree of operating leverage
• Assumptions of CVP analysis
• Break even point analysis
• Target profit analysis
• Margin of safety
• Sales mix and break even with multiple products
• Limitations of Cost Volume Profit Analysis

 

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