Budgeting Basics and Beyond

Chapter 4. Break-even and Contribution Margin Analysis: Profit, Cost, and Volume Changes

Break-even and contribution margin analysis, also known as cost-volume-profit (CVP) analysis, helps managers perform many useful analyses. It deals with how profit and costs change with a change in volume. More specifically, it looks at the effects on profits of changes in such factors as variable costs, fixed costs, selling prices, volume, and mix of products sold. By studying the relationships of costs, sales, and net income, management is better able to cope with many planning decisions.

Break-even analysis determines the break-even sales. Break-even point—the financial crossover point when revenues exactly match costs—does not show up in corporate earnings reports, but managers find it an extremely useful measurement in a variety of ways.