30 Apr CVP Graph
Posted at 09:26h in 0 Comments
The cost volume profit graph, which is abbreviated as the CVP graph, illustrates the relationship between the costs of production and sales.
What is a CVP Graph?
The purpose of making a CVP graph is to help a company determine the impact that a change in sales volumes has on cost and profits. It is necessary to make certain assumptions when preparing a CVP graph:
What does CVP graph mean?
- Fixed costs remain constant regardless of the level of production.
- The company is able to sell each unit that it produces.
- The selling price of each unit is the same.
- Each additional unit of production results in the same increase in variable costs.
The following CVP graph represents Zephyr Corporation’s costs and production levels: The vertical axis denotes dollar amounts and the horizontal axis represents units of production. The thick green line at the $10,000 level represents fixed costs. This does not change with the level of production. It remains constant at $10,000 even if there is no production. The blue line is the total cost line. When there is zero production, total costs are at $10,000. The total costs gradually rise with the increase in production. The yellow line represents sales. At a 100 units of production, when total costs are at $30,000, breakeven is achieved. After this point, Zephyr starts making profits.
Example of CVP graph
This simple graphical representation that presents data about fixed costs, variable costs, and sales can be a useful tool for determining the company’s future profitability.