What Is Cost-Volume-Profit (CVP) Analysis?
Cost-Volume-Profit analysis shows the relationship between a company's costs, sales volume, and profit. It helps managers find the break-even point and plan pricing and production decisions.
CVP analysis calculates how many units must be sold to cover fixed and variable costs (break-even), and how profit changes as volume changes. Formula: Break-even = Fixed Costs / (Price − Variable Cost per unit).
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Step-by-step worked examples
A café has $3,000 fixed costs (rent, salary). Each coffee costs $2 to make and sells for $5. Break-even units?
Break-even = FC / (P − VC) Break-even = $3,000 / ($5 − $2) Break-even = $3,000 / $3 = 1,000 coffees
At 1,200 coffees sold (continuing café example), what is profit?
Total Revenue = 1,200 × $5 = $6,000 Total Variable Cost = 1,200 × $2 = $2,400 Total Cost = $3,000 + $2,400 = $5,400 Profit = $6,000 − $5,400 = $600
Café raises coffee price to $6. New break-even?
Break-even = $3,000 / ($6 − $2) Break-even = $3,000 / $4 = 750 coffees (Lower units needed → higher profit at same volume)
Flashcards
Quick quiz
Q1.A product sells for $100, variable cost is $40, fixed costs are $6,000. Break-even units?
Q2.CVP analysis assumes all of the following EXCEPT:
Q3.If fixed costs rise by 50%, break-even point…
Q4.At break-even, profit is:
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Common mistakes
Confusing break-even units with break-even dollars. — Correct: Break-even units = FC/(P−VC); break-even revenue = units × price.
Assuming variable costs don't scale with volume. — Correct: Variable costs per unit are constant; total variable costs scale with units sold.
Ignoring fixed costs in break-even calculation. — Correct: Fixed costs must be covered first — they dominate the break-even point.
Thinking profit increases linearly after break-even. — Correct: Yes, it does — profit = (units × contribution margin) − fixed costs. Linear after reaching zero.
FAQ
Why is break-even analysis important?
It shows the minimum sales needed to avoid loss and helps set pricing, production, and marketing strategies.
Can break-even be negative?
No, break-even point is always zero profit. But a company can run at a loss below break-even.
How does a discount affect break-even?
Lowering price increases the break-even units needed — customers get a deal but the company must sell more.
Is break-even the same for all products?
No, each product has its own break-even based on its price, variable cost, and allocated fixed costs.