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Cost Volume Profit (CVP analysis), also commonly referred to as Break Even Analysis, is a way for companies to determine how changes in costs (both variable and fixed) and sales volume affect a company’s profit. With this information, companies can better understand overall performance by looking at how many units must be sold to break even or to reach a certain profit threshold or the margin of safety.
#1 CM Ratio and Variable Expense Ratio
CM Ratio = Contribution Margin / Sales
Variable Expense Ratio = Total variable costs / Sales
#2 Break-Even Point
BEP = total fixed costs / CM per unit
#3 Changes in Net Income (what-if analysis)
# of units = (fixed costs + target profit) / CM ratio
#4 Margin of Safety
Margin of safety = Actual sales – break-even sales
#5 Degree of Operating Leverage (DOL)
DOL = CM / Net Income
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Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
Additional Questions & Answers
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
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