Business Glossary

one that determines how profits vary with changes in volume. Profits are plotted on the vertical axis while units of output are shown on the horizontal axis. See the sample chart below.

analysis that deals with how profits 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. For example, CVP analysis attempts to answer the following questions: (1) What sales volume is required to break even? (2) What sales volume is necessary in order to earn a desired (target) profit? (3) What profit can be expected on a given sales volume? (4) How would changes in selling price, variable costs, fixed costs, and output affect profits? (5) How would a change in the mix of products sold affect the break-even and target volume and profit potential?

branch of Cost-Volume-Profit (CVP) Analysisthat determines the break-even point, which is the level of sales where total costs equal total revenue. Thus, zero profit results. Breakeven sales is computed as follows:
Break-even sales in units= Fixed costs/Unit contribution margin.
Break-even sales in dollars= Fixed costs/Contribution margin ratio.
For example, assume:
Fixed costs = $15,000.
Unit contribution margin (selling price - unit variable cost) = $15, and Contribution margin ratio (unit CM/selling price) = .6
Then, break-even sales in units= $15,000/$15 = 1000 units andbreakeven sales in dollars= $15,000/.6 = $25,000.
A break-even chart is one in which sales revenue, variable costs, and fixed costs are plotted on the vertical axis while volume is plotted on the horizontal axis. The break-even pointis the point at which the total sales revenue line intersects the total cost line. See the sample chart below.