What is a CVP Graph?
Definition: A CVP Graph, or cost volume profit chart, is a graphical representation that shows the relationship between the cost of production and overall sales. Companies plot the CVP graph to ascertain the potential impact of changes in sales volume on production costs and overall profits. The chart, in this case, takes into consideration fixed costs, total costs, and total sales.
Companies engaged in manufacturing processes rely on the CVP graph to ascertain the breakeven point. Likewise, the graph acts as an essential aide in the planning of production as well as sales activities. The graph also provides an accurate representation of fixed and variable costs.
Some of the assumptions made in the preparation of the CVP graph include ensuring fixed costs don’t change even with a ramping up or lowering the level of production. Likewise, it is assumed that a company would be able to sell all the products it produces.
The selling price of all products produced must remain the same until all products are sold. Similarly, any additional unit produced results in the same increase in variable cost
Cost Volume Profit (CVP) Graph Example
On a CVP graph, the vertical axis, which is in dollar amounts, represents the total costs of production that increase with an increase in units produced. The Horizontal axis, on the other hand, denotes the total units produced at different levels.
Likewise, the thick green line inside the graph denotes the fixed costs of production that remain constant at $10,000 regardless of the units produced. Fixed costs also remain constant, with zero units produced.
The blue line, on the other hand, denotes the total costs of production, which increases gradually with an increase in the units produced. When no units produced, the total cost of production remains $10,000.
The yellow line, on the other hand, denotes the total products sold. At 100 units, the total cost of production is $30,000, which is the breakeven point. The breakeven point is, therefore, the point where the total costs line crosses the total sales line.
The breakeven point is essentially the point at which the total costs are equal to total revenues generated. At this point, a business will not make any profit or loss.
Cost Volume Profit Graph Analysis
Cost volume graph plays an important role in cost volume profit analysis, an accounting technique that seeks to show the impact of sales volume and product cost on overall profit. Cost volume profit analysis aims to show how changes in variable costs, as well as fixed costs and selling price per unit, affects operating profit.
Cost volume profit analysis can, therefore, be used to measure contribution margin, which is the difference between total revenue and total variable costs. The analysis also helps in the measuring of contribution margin per unit, which is the difference between the sales price and variable costs per unit. Likewise, it can help in ascertaining breakeven point, which is the sales volume at which a company is not making any loss or profit.
Companies or businesses carry out cost volume analysis to ascertain how changes in costs and volume might affect operating income and net income. While carrying out the analysis, several assumptions are made.
Sales price per unit sold, as well as variable costs per unit, must remain constant throughout. Similarly, total fixed costs must remain consent. It is also assumed that all units produced are to be sold out eventually. The analysis also requires firms to identify all costs as either variable or fixed.
Summary
Cost volume graph is essentially a graphical representation that tries to show the relationship between fixed cost, variable costs, and sales. Ultimately, it helps in the determination of the breakeven point as well as a company’s future profitability.