🎓 Prepared by students from Boğaziçi University

What is Cost-Volume-Profit Analysis?

Cost-volume-profit (CVP) analysis examines the relationships between production volume, costs, pricing, and profit. It answers the critical question: how many units must I sell to break even or reach a profit target?

Short answer

CVP uses the break-even formula (BE = FC / CM per unit) to determine the volume needed to cover fixed costs. It helps managers set prices, control costs, and plan profitability.

Cost-Volume-Profit Chart (Break-Even Analysis)

x: Units Sold · y: $ (Revenue, Costs, Profit)Total RevenueTotal Cost (FC + VC×Q)Profit (Revenue - Total Cost)

Try it: interactive calculator

Break-Even Quantity

1,667units

= 50,000 / (50 - 20)

Fixed Costs (rent, salaries)50,000 currencySelling Price per Unit50 currencyVariable Cost per Unit (materials, labor)20 currency

Step-by-step worked examples

A bakery has fixed costs of $10,000/month. Each loaf sells for $5 with a variable cost of $2. How many loaves must it sell to break even?

BE = FC / (P − VC)
BE = $10,000 / ($5 − $2)
BE = $10,000 / $3
BE = 3,333 loaves (rounded)
The bakery breaks even at 3,333 loaves per month

A software company has annual fixed costs of $500,000. Each subscription is priced at $100/year with variable costs of $20/year (support, hosting). Break-even subscribers?

BE = $500,000 / ($100 − $20)
BE = $500,000 / $80
BE = 6,250 subscribers
The company needs 6,250 subscribers to cover fixed costs

A manufacturer has FC = $150,000, price = $80/unit, VC = $50/unit. What sales revenue is needed to earn $30,000 profit?

Target Profit = (FC + Desired Profit) / Contribution Margin
Contribution Margin per unit = $80 − $50 = $30
Quantity needed = ($150,000 + $30,000) / $30 = 6,000 units
Revenue = 6,000 × $80 = $480,000

Flashcards

Quick quiz

Q1.Fixed costs $60,000, price $40, variable cost $15 per unit. Break-even quantity?

Correct answer: B. BE = $60,000 / ($40 − $15) = $60,000 / $25 = 2,400 units.

Q2.What is contribution margin?

Correct answer: B. Contribution margin = P − VC; it's the amount each sale contributes to fixed costs and profit.

Q3.If a company sells above break-even, it:

Correct answer: B. Above break-even, each additional unit generates profit equal to the contribution margin.

Q4.Which reduces the break-even point?

Correct answer: D. Higher contribution margin (higher price or lower VC) lowers the units needed to break even.

📄Download this topic as a printable worksheet (PDF)Summary + 10 questions + answer key — print it, share it in class.↓

Study better with Bounlu apps

Notek

The full card deck, worked steps and AI-tutor support for “What is Cost-Volume-Profit Analysis?” are in Notek — study by hand before your exam.

Get it free

PromyNever miss an exam or homework deadline with Promy: AI turns the dates in your inbox into reminders automatically.

Common mistakes

✗

Confusing fixed and variable costs. — Correct: Fixed costs (rent) don't change with volume; variable costs (materials) scale with output.

✗

Using break-even as a profit goal. — Correct: Break-even is zero profit; calculate the quantity needed for your target profit instead.

✗

Ignoring the contribution margin. — Correct: Contribution margin (P − VC) is the engine of CVP analysis; it drives profitability.

✗

Assuming constant contribution margin per unit. — Correct: Discounts, economies of scale, or rising labor costs can change CM; recalculate when conditions change.

FAQ

What is cost-volume-profit analysis used for?

CVP determines break-even point, plans profit targets, evaluates pricing, and assesses cost changes' impact on profitability.

How do you calculate break-even in dollars?

Break-even Revenue = Break-even Quantity × Selling Price per unit.

What if contribution margin is negative?

The product is losing money on each sale; stop selling it or increase price / reduce variable costs immediately.

Can break-even change during a year?

Yes. If fixed costs increase, prices change, or variable costs rise, recalculate the new break-even point.