Cost Volume Profit (CVP) Relationship in Graphic Form:
- Prepare a CVP graph or breakeven
The relationships among revenue, cost, profit and
volume can be expressed graphically by preparing a cost-volume-profit (CVP)
graph or break even chart. A CVP graph highlights CVP relationships over wide ranges of activity
and can give managers a perspective that can be obtained in no other way.
Preparing a CVP Graph or Break-Even Chart:
In a CVP graph some times called a break even chart unit volume is commonly
represented on the horizontal (X) axis and dollars on the vertical (Y) axis.
Preparing a CVP graph involves three steps.
1. Draw a line parallel to the volume axis to present
total fixed expenses. For example we assume total fixed expenses $35,000.
2. Choose some volume of sales and plot the
point representing total expenses (fixed and variable) at the activity level you
have selected. For example we select a level of 600 units. Total expenses at
that activity level is as follows:
|Variable Expenses (150×600)
the point has been plotted, draw a line through it back to the point where the
fixed expenses line intersects the dollars axis.
3. Again choose some volume of sales and plot the point
representing total sales dollars at the activity level you have selected. For
example we have chosen a volume of 600 units. sales at this activity level are
$150,000 (600units × $250) draw a line through this point back to the origin.
The break even point is where the total revenue and total expense lines cross.
See the graph and note that break even point is at 350 units. It means
when the company sells 350 units the profit is zero. When the sales are below
the break even the company suffers a loss. When sales are above the break even
point, the company earns a profit and the size of the profit increases as sales