Cost-Volume-Profit Analysis
I. Cost-Volume-Profit Analysis (CVP)
A. General info
1. CVP analysis helps manager understand the relationship between cost, volume, and profit.
2. This is important to making business decisions. Decisions such as…
a. How much to price the product?
b. What marketing strategy to employ?
c. What type of production facilities to acquire?
3. 2 types of analysis that fall under Cost-Volume-Profit Analysis are
a. Break-Even Analysis
b. Target Profit Analysis
B. Break-Even Analysis
1. General info
a. Break-even analysis is finding the number of units to break even and the break even amount in dollars
b. Break-even point is…
i. The level of sales at which the profit = 0
ii. When revenues equal expenses exactly.
iii. Usually businesses aim to at least break-even during its first year of operation.
2. Problem
Company X buys speakers directly from a manufacturer at $150 per set. It then sells the speakers to customers at $250 per set. Company X also has to pay $35,000 for monthly expenses (i.e. rent, insurance, employee salaries, etc.).
a. How many speaker sets need to be sold in order for the company to break-even for the month?
b. How much in sales (in terms of dollar amount) needs to be made in order for the company to break-even for the month?
3. Solution
In business, the formula to find profit is…
Sales – Variable costs – Fixed costs = Profit
Based on the information provide, you can create an algebraic equation to fit this formula…
$250X – 150X – 35,000 = 0
Note…
X = Number of speaker sets sold
$250 = Sales price per unit
$150 = Variable costs per unit
$35,000 = Fixed costs
Solution
$250X – 150X – 35,000 = 0
$100X = 35,000
X = 350
a. If you solve for the equation, you will find that X = 350 speaker sets. This is the number of speaker sets that have to be sold for the company to break even.
b. The breakeven point in sales dollars can be calculated by multiplying break-even unit sales by the selling price per unit:
350 speakers X $250 per speaker set = $87,500
C. Target Profit Analysis
1. General info
a. This is used to find the sales volume needed to achieve a target profit
b. This is similar to the break even analysis above. The only difference is that instead of 0 profits, we now insert our target profit in the equation.
2. Problem
Company X buys speakers directly from a manufacturer at $150 per set. It then sells the speakers to customers at $250 per set. Company X also has to pay $35,000 for monthly expenses (i.e. rent, insurance, employee salaries, etc.).
a. How many speaker sets need to be sold in order for the company to have a $40,000 profit for the month?
b. How much in sales (in terms of dollar amount) needs to be made in order for the company to have a $40,000 profit for the month?
3. Solution
Again, in business, the formula to find profit is…
Sales – Variable costs – Fixed costs = Profit
Based on the information provide, you can create an algebraic equation to fit this formula…
$250X – 150X – 35,000 = 40,000
Note…
X = Number of speaker sets sold
$250 = Sales price per unit
$150 = Variable costs per unit
$35,000 = Fixed costs
Solution
$250X – 150X – 35,000 = 40,000
$100X = 75,000
X = 750
a. If you solve for the equation, you will find that X = 750 speakers sets. This is the number of speaker sets that have to be sold for the company to make $40,000.
b. Total sales dollars can be calculated by multiplying the number of speaker sets by the selling price per unit:
750 speakers X $250 per speaker set = $187,500