1. Contribution Margin Statement Approach
Break even point(BEP) and other required cost volume profit relationships can be explained through contribution margin by following the variable costing income statement approach under which all fixed costs of the period are deducted out of the contribution margin of the same period. Only the variable costs vary proportionally to the level of outputs or sales.
2. Equation Or Formula Approach
The most often practiced approach of cost volume profit analysis is the equation or formula approach. In fact, we use equation approach to the solution of CVP analysis instead of the graph or the income statement.
As we know,
Sales= Variable expenses + Fixed expenses + Net profit
If sales volume= Q units, variable cost pe
r unit = V, total fixed cost= FC and selling price per unit = S, then the equation can be simplified as;
QS = QV+FC+Profit
or, QS-QV= FC+Profit
or, Q(S-V)= FC+ Profit
Simplifying the equation, we get:
Q = FC+Profit/S-V
Sales unit = FC+Profit/CMPU
Where,
S-V= CMPU
Above equation or formula can be applied to find out any one unknown value of the variable either fixed costs or variable costs.
In order to compute the sales revenue instead of the sales units the following formula is used:
Sales Revenue = Sales Units x Selling price per unit (SPPU)
