COST-VOLUME-PROFIT (CVP) ANALYSIS - CABLE BUSINESS EXAMPLE

1. What is CVP Analysis? 
CVP analysis helps you understand how changes in costs and sales volume affect operating and net income. It shows the relationship between: 
- Cost: Fixed and variable costs involved in production 
- Volume: Number of units sold 
- Profit: The remaining amount after covering costs 

➡️ CVP Analysis is useful for: 
- Setting sales targets 
- Calculating break-even points 
- Analyzing the profitability of different scenarios 

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2. Contribution Margin Formula 

Contribution Margin = Revenue (Sales) - Cost 

Contribution Margin = Revenue - Variable Costs 

➡️ Contribution margin represents the profit available to cover fixed costs after paying variable costs. 

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3. Example: Cable Sales 
You are running a cable business and selling electrical cables. Here's the financial data: 
- Selling Price per Meter = $10 
- Cost of Materials and Production per Meter (Variable Cost) = $6 
- Monthly Fixed Costs (Rent, Salaries, etc.) = $2,000 

Step 1: Contribution Margin per Meter: 
Contribution Margin = 10 - 6 = 4 

➡️ Contribution margin per meter is $4. 
➡️ This means each meter sold contributes $4 to cover fixed costs and generate profit. 

Step 2: Break-even Point (in meters): 
Break-even Point = Fixed Costs / Contribution Margin 
Break-even Point = 2000 / 4 = 500 meters 

✅ You need to sell at least 500 meters of cable each month to cover fixed costs and break even. 

Step 3: Profit Scenario: 
If you sell 800 meters in a month: 
- Total Revenue = 800 × 10 = 8,000 
- Total Variable Costs = 800 × 6 = 4,800 
- Contribution Margin = 8,000 - 4,800 = 3,200 
- Profit After Fixed Costs = 3,200 - 2,000 = 1,200 

➡️ If you sell 800 meters, your net profit is **$1,200**. 

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4. Why Contribution Margin Matters 
- Higher contribution margin = More profit available to cover fixed costs and increase net income. 
- Lower contribution margin = Higher volume required to cover fixed costs. 

➡️ If contribution margin is too low, increasing sales volume might not be enough to reach profitability. 
➡️ Reducing variable costs or increasing selling price can improve contribution margin. 

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5. Common Mistakes to Avoid 
❌ Confusing fixed and variable costs → Fixed costs remain constant regardless of volume, variable costs change with volume. 
❌ Ignoring the impact of volume changes → Profitability depends on both sales price and volume. 
❌ Overestimating contribution margin → High fixed costs may still result in losses despite high contribution margin. 

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