Skip to main content
Home
The Online Resource for Modern FP&A Professionals
Please register to receive the latest FP&A news, updates and tips Login

Main menu

  • Home
  • FP&A Insights
    • FP&A Trends Digest
    • FP&A Trends Research
    • FP&A Trends Insight Paper
    • FP&A Trends Survey
    • Short Videos
    • Our Contributors
  • FP&A Events
    • International FP&A Board
    • FP&A Trends Webinars
    • Digital FP&A Circles
  • AI/ML Committee
    • Introduction
    • Members
    • Resources
    • Meetings
  • FP&A Tools
    • FP&A Trends Maturity Model
  • About Us
    • Company Policy
    • Privacy Policy
    • Editorial Guidelines
    • Our Ambassadors
    • Our Sponsors & Partners
    • Contact Us
image
Why Cost Volume Profit Analysis (CVP) Should Be a Main Step in Your Annual Profit Plan?
August 21, 2019

By Belal El-Shaf'ei, Board Advisor at PRO BusinessWare

FP&A Tags
Financial Planning and Analysis
Planning and Budgeting
Cost Planning
Profitability Analysis

Traditional budgeting process normally starts with forecasting sales levels, cost of goods sold then all operation expenses until reaching to the proforma income statement without understanding how changes in costs (both variable and fixed) & sales will affect profits in future periods. But modern FP&A professionals started to implement CVP analysis during the annual profit plan to study the interaction of sales with variable & fixed costs on the profits received.

What's Cost Volume Profit (CVP) Analysis?

CVP analysis is a planning tool that management uses to predict the volume of activity, costs incurred, sales values, and profits received. In CVP analysis, we are looking at the effect of three variables (Costs, Sales volume & Sales Price) on one variable "Profit".

CVP Analysis Steps:

  1. Classify costs & identify contribution margin.
  2. Calculate the break-even point in units & dollars.
  3. The margin of safety & Target income calculations.
  4. Using CVP analysis model for Sensitivity Analysis.

Classify costs & identify contribution margin:

CVP analysis classifies all costs as either fixed or variable. Fixed costs are expenses that don’t fluctuate directly with the volume of units produced/sold. An example of a fixed cost is rent expense for a retail store. It doesn’t matter how many units will be sold in the store. The rent expense will always be the same.

On the other hand, Variable costs change with the levels of production/sales. These costs include materials and labor that go into each unit produced. For example, the cost of PCs sold in a retail store is considered as variable cost; the more units sold, the more PCs cost will be.

Contribution Margin: the unit contribution margin is the selling price of a product minus all variable costs incurred to produce or sell this product. It measures the amount of the selling price of a unit that is used to cover fixed costs for this unit.

  • Unit Contribution Margin (UCM) = unit selling price - unit variable cost.
  • Contribution margin % = UCM / Unit selling price.

Calculate the break-even point in units & dollars:

Simply: the break-even point is the sales level where total revenues equal total costs. But the main thing that you must understand in break-even analysis is the difference between revenues and profits. Not all revenues result in profits for the company. Many products cost more to make or sell than the revenues they generate. Since the expenses are greater than the revenues, these products great a loss not a profit.

The purpose of the break-even analysis is to calculate the amount of sales that equates revenues to expenses and the amount of excess revenues, also known as profits, after the variable & fixed costs are met.

  • Break-even point in units = Total Fixed Cost / Unit contribution margin (UCM).
  • Break-even point in dollars = Fixed Costs / Contribution margin %.

Margin of safety & Target income calculations:

Margin of safety is the excess of budgeted sales over break-even sales. It's the amount by which sales can decline before losses occur.

Margin of safety = Planned Sales - Break-even sales*

Margin of safety % = Margin of safety / Planned sales

*Break-even sales means the sales amount that achieves the break-even point.

Target Income Calculations:

Target income sales can be measured in CVP analysis based on Target Operating Income or Target Net Income (the variance mainly depend on that tax rate in each country). Let's focus here on Target Operating Income.

Target Income Sales is the amount of sales needed to cover all variable & fixed costs plus the target income. Target income is the operating income that a company wants to achieve during a specific period.

Target Income sales in units = (Fixed Costs + Target operating income) / UCM

Target Income sales in $ = (Fixed Costs + Target operating income) / contribution margin %.

Using CVP analysis model for Sensitivity Analysis:

CVP analysis model can be used for a single product, multiple products & service companies as well to perform sensitivity analysis (also called what-if analysis).

Sensitivity analysis shows how the CVP model will change with changes in any of its variables (fixed costs, variable costs, sales price, or sales mix). The focus is typically on how changes in variables will affect profit.

Finally, sensitivity analysis can be used in break-even & target income sales calculations because it offers different scenarios whether by increasing sales, reducing variable cost or even cutting down the fixed cost. FP&A professionals rely on Microsoft Excel so much to perform CVP & sensitivity analysis models.

The full text is available for registered users. Please register to view the rest of the article.
  • Log In
  • or
  • Register

Related articles

How to Manage Cost Without a Traditional Budget
April 18, 2019

Although Beyond Budgeting is about so much more than just budgets, our name tends to draw...

Read more
Two Proven Techniques to Minimize Optimism Bias in Financial Planning & Analysis
March 22, 2016

One of the realities that FP&A professionals need to realize is people tend to be too...

Read more
Quality of FP&A: Managing Biases within Financial Analysis
April 27, 2016

One can find many definitions of financial analysis. Investopedia defines financial analysis as “the process of evaluating...

Read more
Sensitivities, Scenarios, What-if Analysis – What’s the Difference?
November 22, 2019

Scenario analysis, sensitivity analysis and what-if analysis are very similar concepts and are really only slight...

Read more
Scenario Planning and Modern FP&A
March 4, 2019

Following on from the success of the 21st London FP&A Board, we had the pleasure...

Read more
Sensitivity Analyses
Developing and Managing Scenarios and Sensitivity Analyses
July 9, 2020

A proper financial model that provides quick answers to different changes will help you make your...

Read more
+

Subscribe to
FP&A Trends Digest

We will regularly update you on the latest trends and developments in FP&A. Take the opportunity to have articles written by finance thought leaders delivered directly to your inbox; watch compelling webinars; connect with like-minded professionals; and become a part of our global community.

Create new account

image

Event Calendar

Pagination

  • Previous
  • May 2025
  • Next
Su Mo Tu We Th Fr Sa
27
28
29
30
1
2
3
 
 
 
 
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Transforming FP&A Together: Human & AI Synergy
 
18
19
20
21
22
23
24
Moving from FP&A to Extended Planning and Analysis (xP&A)
 
Five Critical Roles for Building a World-Class FP&A Team
 
25
26
27
28
29
30
31
FP&A Business Partnering and AI: A New Era
 
All events for the year

Future Meetings

The Face-to-Face Amsterdam FP&A Board
The Face-to-Face Amsterdam FP&A Board Transforming FP&A Together: Human & AI Synergy

May 15, 2025

The Face-to-Face Milan FP&A Board
The Face-to-Face Milan FP&A Board Moving from FP&A to Extended Planning and Analysis (xP&A)

May 20, 2025

The Face-to-Face Frankfurt FP&A Board
The Face-to-Face Frankfurt FP&A Board Five Critical Roles for Building a World-Class FP&A Team

May 22, 2025

BPAI
The FP&A Trends Webinar FP&A Business Partnering and AI: A New Era

May 28, 2025

The Face-to-Face London FP&A Board: Data Management & Analytics: Unlocking FP&A Value
The Face-to-Face London FP&A Board Mastering Data in FP&A: Smarter Analytics, Better Decisions

June 5, 2025

FP&A Trends Webinar The Evolving Role of FP&A: From Number Cruncher to Strategic Advisor
The FP&A Trends Webinar Making FP&A Teams Fit for the Future

June 11, 2025

The Face-to-Face New York FP&A Board
The Face-to-Face New York FP&A Board From Insight to Impact: FP&A Business Partnering in Action

June 17, 2025

The Face-to-Face Sydney FP&A Board
The Face-to-Face Sydney FP&A Board Modern Financial Planning and Analysis (FP&A): Latest Trends and Developments

June 26, 2025

The Face-to-Face Singapore FP&A Board: Modern Financial Planning and Analysis (FP&A): Latest Trends and Developments
The Face-to-Face Singapore FP&A Board Modern Financial Planning and Analysis (FP&A): Latest Trends and Developments

July 8, 2025

AI/ML FP&A
AI/ML FP&A
Data and Analytics
Data & Analytics
FP&A Case Studies
FP&A Case Studies
FP&A Research
FP&A Research
General
General
Integrated FP&A
Integrated FP&A
People and Culture
People and Culture
Process
Process
Technology
Technology

Please register to receive the latest FP&A news, updates and tips.

info@fpa-trends.com​

              

Foot menu

  • FP&A Insights
  • FP&A Board
  • FP&A Videos

Footer countries

  • Amsterdam
  • Austin
  • Boston
  • Brisbane
  • Brussels
  • Chicago
  • Copenhagen
  • Dubai
  • Frankfurt
  • Geneva
  • Helsinki
  • Hong Kong
  • Houston
  • Kuala Lumpur
  • London Board
  • London (Circle)
  • Melbourne
  • Miami
  • Milan
  • Munich
  • New York
  • Paris
  • Perth
  • Riyadh
  • San Francisco
  • Seattle
  • Shanghai
  • Singapore
  • Stockholm
  • Sydney
  • Tokyo
  • Toronto
  • Washington D.C.
  • Zurich

Copyright © 2025 fpa-trends.com. All rights reserved.

0