Cost-Volume-Profit analysis is one of the fundamental types of analysis that deals with product profitability. It classifies the costs into a variable (which changes in line with volumes produced) and fixed (which does not change with volumes produced). The purpose of a business is to cover both types of costs and to make a profit.
Assuming the selling price is above the variable cost of the product, this product generates a contribution margin equal to the selling price less variable cost. We need to sell a sufficient volume of products so that the total contribution margin covers fixed costs. The point at which this is achieved is called a breakeven point. This point is measured in terms of volumes.
If we sell above breakeven we are making a gross profit. The difference between the current volumes/revenues and breakeven volumes revenues is called the margin of safety and is measured in terms of volumes and revenues. It shows the “buffer” which we have to stay profitable.
A traditional breakeven analysis has a number of limitations.
Firstly, it assumes all costs can be classified into fixed and variable, while in reality, a fixed cost (e.g., depreciation) will increase if the volumes go above the current production capacity and additional equipment is required. Economists argue that, in the long run, all costs tend to become variable.
Changes in volumes are often driven by changes in prices. The “classic” analysis ignores this, assuming the prices remain constant.
If a company manufactures more than one product, changes in mixes might affect the contribution margin and the whole analysis.
Similar Products
Other customers were also interested in...
Product Dealer Startup – The Customer Centri...
With this financial model, you can create a financial plan for the startup of your product dealershi... Read more
Complete Three-Statement Monthly Budget with Scena...
This is a comprehensive set of templates that will help you build your budget. The templates are bui... Read more
Complete Three-Statement Quarterly Budget with Sce...
This is a comprehensive set of templates that will help you build your budget. The templates are bui... Read more
Complete Three-Statement Quarterly Budget
This is a comprehensive set of templates that will help you build your budget. The templates are bui... Read more
Complete Three-Statement Monthly Budget
This is a comprehensive set of templates that will help you build your budget. The templates are bui... Read more
Complete Private Equity (LBO) Financial Model
This is a professional financial model which performs a thorough assessment of a private equity proj... Read more
Private Equity Fund Model (Investor Cashflows)
Private Equity Financial Model to analyze fund cashflows and returns available to Limited Partners (... Read more
All My Financial Models, Spreadsheets, Templates, ...
Lifetime access to all future templates as well! Here is a set of spreadsheets that have some of the... Read more
Due Diligence P&L – Exhaustive Revenue a...
Model for in depth understanding of high level profit and loss and revenue analysis. Big-4 like chec... Read more
Advanced Financial Model with DCF & Valuation
New Version Updates:• Model is now dynamic. Users can select the desired forecast length for up to... Read more
You must log in to submit a review.