Reclaimed Water

CVP Analysis Applied

The training program is detailed physical activities and nutrition information for teachers, YMCA leaders, physicians, daycare providers, etc. In deciding to launch this training program a Cost volume profit (CVP) analysis could have been used to see if the program could afford it, and how the program could afford it. I decided to apply the analysis to one project for the sake of simplicity, since its application to our department activities, or those of the hospital as a whole is complicated. The application is more challenging than the theory.

The first step is a basic “break-even” analysis, which would reveal the point at which total revenues from program fees equals total costs (both fixed and variable costs). At this breakeven point the program does not actualize income or loss.

An example would be the following:

Break Even Units = Fixed Costs (staff time, manuals)/ fee per person attending - variable costs per unit

Break Even Sales = Fixed Costs/contribution margin (unit price – unit variable cost)

CVP analysis involves the following:

Sales (in this case, fees paid for service)

Variables costs (venue rental fees, travel costs for staff)

Contribution Margin (unit price – unit variable costs)

Fixed costs (arguably staff time and manual production)

Profit (EBIT – earnings before interest and taxes)

As an overall equation –

Sales

-Variable costs

Contribution margin

-Fixed Costs

EBIT (profit)

Applying CVP to my example of instruction sessions for a fee is difficult because it assumes the following:

• Constant total fixed costs – I would have to assume that staff time per session would be a constant cost as well as costs for manual production

• Constant variable cost per unit – I would have to assume that variable costs such as travel costs for staff and differences in venue rental would translate into a constant variable cost per unit (individual attending the class)

• Constant sale price – the fee...