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And finance Allah shmoop What is CVP and or cost

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volume Profit analysis All right For starters CVP is not

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that thing that runs a computer That cpu Yeah And

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it's not a drugstore that c v s And it's

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not a fancy name for resumes That's uh just CV

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CVP cost volume profit analysis Well CVP is all about

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profits rather than optimizing profits Yes subtle thing There you

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are running a company You make foam padding for people

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who experienced a psychotic breaks to put on their bedroom

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walls You're trying to figure out what pricing delivers the

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best operating or net income returns All right what time

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is it Yes it's time for CVP analysis Yet you

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knew going well this thing helps you find the answer

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in a kind of matthew way to optimizing your problems

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You know So you're not just throwing darts or shaking

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a magic eight ball or something although we think that's

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pretty cool OK well when you run a CVP you

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make some assumptions You use a whole lot of scenarios

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that don't necessarily reflect real life but they help the

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math along For instance you assume all of your inventory

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gets sold like you're not monkeying around with inventory ballooning

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on your shelves and hiding profits Nor are you depleting

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it suddenly to generate suddenly a lot of cash and

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well taxes Maybe you're also assuming that pricing is flat

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You're neither raising nor lowering pricing and your margins then

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should pretty much stay about the same You know like

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if you're keeping prices flat the price per square yard

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stay steady for the head butter two thousand And that

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thing which is your primary product right You're also assuming

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that your cost of producing the foam is flat and

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squishy Well the variable costs remain constant flat you know

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like the padding And you're assuming that there are no

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meaningful changes to your phone fixed costs like rent or

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insurance or the machine that squeezes out the patting twenty

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four by seven The on ly change here the on

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ly input in the equation you're going to monkey with

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is act activity I e volumes sold So the basic

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question you're asking How does prophet change when we change

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the amount of stuff we make What happens if we

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make Maur What happens if we make less That's what

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we're asking Well the star of the show and CVP

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analysis is country abuse Shin margin So you're producing million

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yards of patting CVP is all about figuring out what

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happens when you produce that million and one thir million

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and first yard of padding When you produce your first

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yard will that yard costs a fortune right from a

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mass standpoint you bought all that equipment hired all those

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workers built a whole factory just to make one yard

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of patting very expensive But as you make more well

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the cost gets spread out over more product All the

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fixed costs like rent insurance and so on get applied

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to a larger number of units There Amor ties across

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a bigger base right the per unit cost then drops

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well Once you're running the factory and churning out patting

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it becomes all about contribution margin like that's the rule

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that runs your company Optimize it So if that last

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pad sells for ten bucks a yard and it cost

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you six bucks a yard to make well then your

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contribution per yard is four bucks and your contribution margin

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is forty percent Yeah that works for over ten It's

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basically revenue or rather sales than subtracting all the variable

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costs in making that yard That's on a per unit

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basis If the whole company's sold twenty million dollarsworth of

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lunatic padding in a given year and it had total

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variable cost If I'LL say fourteen million well then companywide

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contribution margin delivery would be about six million bucks right

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Twenty minutes fourteen contribution think donation to profits from sales

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or something like that So the next big thing think

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about is the break even point At what volume or

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level of sales does the head butter two thousand cover

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It's fixed Recurring costs where profits are zero and the

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company is joss squeaking by like How much should it

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produce Well let's say your factory has six million dollars

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in fixed costs That amount covers things like rent on

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the factory in the cost of the machines and so

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on When you make that first yard of patting it

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cost six million dollars sell it for ten bucks and

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you've lost five million nine hundred ninety nine thousand nine

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hundred ninety dollars Good for you Okay so we need

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to figure out just how many yards you have to

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make until that bottom line reaches zero Well At what

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point Teo sales cover costs wealth the math equation sales

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At this point this break even point equals total variable

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cost plus total fixed costs and fixed costs are the

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same as the contribution totals So the Head Butter two

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thousand has fourteen million dollars invariable costs The cost of

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the raw materials and labor IT center all included in

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there and there are six million dollars in fix recurring

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cost So then it's sales of twenty million box It's

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just breaking even That sales volume equates to two million

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yards worth of padding Sold it ten bucks each with

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two million yards you're covering for the cost of the

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patting itself and the labor and the electricity and the

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raw materials and the facility caused and sales and marketing

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and all of it together is fourteen million dollars invariable

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costs Well you're also covered for the six million bucks

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worth of fixed recurring cost like rent insurance and loading

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dock snacks and so on And note that some cost

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like manufacturing or sales can be both fixed and variable

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right You're storing tons of patting You need rent more

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storage space so your rent goes up So when you

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put together a mini income statement like this you label

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it contribution margin income statement because it's not a gap

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compliance set of numbers There's no set of laws that

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makes you Adam up in a certain way right They're

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just there to help managers you know manage okay back

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to break even The fancy formula runs like this Break

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even Sales is or equals total fixed costs over contribution

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margin ratio Well in your case you have six million

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dollars in fixed costs and a contribution margin of seven

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twenty It's or thirty five percent So you divide the

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six million by the point three five to get twenty

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mill in sales as break even see it's like magic

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Well given the cost structure to break even I'ii stop

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losing money on the whole deal You need to reach

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twenty million in sales After that you've taken care of

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all the fixed costs the rent the equipment and so

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on more than twenty million in sales and you start

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to book profits Yeah which should keep your shareholders from

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hitting their heads against the wall though if they did 00:06:05.295 --> [endTime] Well at least you'd have some new customers

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