# CVP Graph

## What is a CVP Graph?

Definition: The cost volume profit graph, which is abbreviated as the CVP graph, illustrates the relationship between the costs of production and sales.

## What does CVP Graph mean?

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:

• 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.

One of the key benefits that a CVP graph provides is that it tells a company about its breakeven point. This allows a firm to plan its production and sales activities.

The CVP graph also puts costs into focus. It highlights fixed costs as well as variable costs.

## Example of CVP Graph

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.

## Summary

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.