Cost-Volume-Profit (CVP) Analysis considers the impact that changes in output have on revenue, costs, and net income. In applying CVP Analysis, costs are separated into variable and fixed costs. This distinction is important because, as mentioned previously, variable costs change with changes in output, whereas fixed costs remain constant throughout what is referred to as a relevant range. CVP analysis is based on the following equation: Profit = Total Revenues - Total variable costs - Total fixed costs

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The formula BEQ= FC/P-VC
Where:
BEQ = Breakeven Quantity
FC= Fixed Costs
P= Price Charged per unit
VC= Variable Costs of production

From the Example:-
BEQ= FC/P-VC = $588,000 / (12.5 – 5.5) = $588,000 / 7 = 84,000 Flags

So the company has to sell to breakeven
Breakeven sales in dollars
To compute contribution margin ratio = Contribution Margin per Unit Sales Price per Unit = 588,000 / (7/12.5) = 588,000 / .56 = $1,050,000

Variable Cost per ratio = Variable Cost per Unit / Sales Price per unit

Desired net profit of $32,200 calculated as follow

BEQ= Fixed Cost + Desired net profit /Contribution margin ratio = $588,000 + 32,200 / (7/12.5) = $620,200 / .56 = $1,107,500

Margin of safety

Cost-Volume-Profit (CVP) Analysis vs multiproduct analysis

Contribution margin ratio (CM Ratio) is the contribution margin as a percentage of total sales. Calculated as following.
CM Ratio