Running head: THE COST-VOLUME- PROFITABILITY ANALYSIS 1

The Cost – Volume- profitability Analysis

BUS 5110 Managerial Accounting Term 4

Portfolio Assignment Unit 3

University of the People

2020, April 30
THE COST-VOLUME- PROFITABILITY ANALYSIS 2

The Cost - Volume - profitability Analysis

In today’s business times, CVP analysis plays a fundamental role in the expansion,

survival, and growth of the business. CVP analysis is a powerful decision making tool used by

managers and other users of accounting information to compute how much sale volume require

to attain certain desired profit or breakeven. To break-even means to cover all expenses without

earning a profit. The key factor most businesses consider before the commencement of their

business operation is determining how much quantities or units required to be sold to breakeven

to earn their desired profit. Often a company or business breakeven point is a position when the

total revenue matches the total expenses, which is a point where the business makes either

returns or loss. According to Johnson (n.d.) indicated that breakeven represents the position

when the “company’s revenue equals total fixed costs plus variable costs, and its fixed costs

equal the contribution margin” (para .4). More specifically, breakeven can be ascertained by

dividing the total fixed cost by contribution margin where contribution margin is the “difference

between sale revenue and variable cost” (Walther & Skousen, 2009).

The essential components associated with break-even analysis consist of sale revenue,

total cost (fixed and variable) as well as the contribution margin. The break-even level in sales

dollars can be calculated by dividing “total fixed costs” by the “contribution margin ratio”

(Heisinger & Hoyle, 2012). Again, the number of quantities or units required to achieve or retain

the desired profit can be calculated by “adding the total fixed cost and target profit that is divided

by the contribution margin” (Heisinger & Hoyle, 2012).

When a company CVP analyses portrayed that the company was not operating at

breakeven it applies that revenue is not equal to cost. This means a loss is made. This situation

occurs when a low amount of sales are made, due to the company’s inability to sell sufficient
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quantities or units to earn profit to cover costs (fixed and variable). When more units or

quantities are sold, it results in the growth of the total revenue to cover the cost of production or

operations of the business. Business failure to sell more units to cover costs may result in loss or

sometimes bankruptcy or insolvency. When a company is not operating at breakeven, the

financial statement affected is the “contribution margin income statement”. To calculate

“contribution margin income”, the total fixed of production is subtracted from the contribution

margin to obtain net operating income or loss (Heisinger & Hoyle, 2012). When a business is not

operating at breakeven, its operating income is mostly affected. The costs of production are more

than the return from sales.

In a nutshell, the cost-volume-profitability (CVP) approach is a vital component of

management accounting and used by manufacturing and non-manufacturing firms to determine

how much sale volume require to attain a certain desired profit.

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References
Johnson, R. (n.d.). What Does the Break-Even Point Mean & What Does a Firm Need to Do to

Achieve a Break-Even? Retrieved from https://smallbusiness.chron.com/breakeven-point-

mean-firm-need-achieve-breakeven-38264.html

Kenton, W. (2020 January 31). Cost-Volume-Profit – CVP Analysis Definition

Retrieved from https://www.investopedia.com/terms/c/cost-volume-profit-analysis.asp

Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0.

Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting. Bookboon.com