CHAPTER TEN

Cost-Volume-Profit Analysis and Leverage

COST-VOLUME-PROFIT ANALYSIS

Cost-volume-profit (CVP) analysis, together with cost behavior information, helps CFOs perform many useful analyses. CVP analysis deals with how profit and costs change with a change in volume. More specifically, it looks at the effects that changes in such factors as variable costs, fixed costs, selling prices, volume, and mix of products sold have on profits. By studying the relationships of costs, sales, and net income, the CFO is better able to cope with many planning decisions.

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

How can you use CVP analysis in solving business problems?

CVP analysis tries to answer these questions:

- What sales volume is required to break even?
- What sales volume is necessary to earn a desired profit?
- What profit can be expected on a given sales volume?
- How would changes in selling price, variable costs, fixed costs, and output affect profits?
- How would a change in the mix of products sold affect the break-even and target income volume and profit potential?

What does “contribution margin” mean?

For accurate CVP analysis, variable costs must be distinguished from fixed costs. Mixed costs must be separated into their variable and ...