research paper on cost volume profit analysis

Management and Cost Accounting pp 205–235 Cite as

Cost-volume-profit analysis

• Colin Drury 2  

1144 Accesses

After studying this chapter, you should be able to:

describe the differences between the accountants’ and the economists’ model of cost—volume—profit analysis;

justify the use of linear cost and revenue functions in the accountants’ model;

apply the mathematical approach to answer questions similar to those listed on pages 213 and 214 in respect of Exhibit 9.1;

construct break-even, contribution and profit—volume graphs;

identify and explain the assumptions on which cost—volume—profit analysis is based;

calculate break-even points for multi-product situations.

This is a preview of subscription content, log in via an institution .

Buying options

• Available as PDF
• Read on any device
• Instant download
• Own it forever
• Compact, lightweight edition
• Dispatched in 3 to 5 business days
• Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Unable to display preview.  Download preview PDF.

References and Further Reading

Anderson, L.K. (1975) Expanded break-even analysis for a multi-product company, Management Accounting (USA) , July, 30–2.

Google Scholar  

Bell, A.L. (1969) Break-even charts versus marginal graphs, Management Accounting (USA) , February 32–35, 48

Bell, A.L. (1969) Break-even charts versus marginal graphs, Accounting for Managerial Decision-making (eds D.T. De Coster, K.V. Ramanathan and G.L. Sundem ), Wiley (1978), pp. 124–32.

Broster, E.J. (1971) The role of price elasticity of demand in profit planning, Journal of Business Finance , Autumn, 18–27.

Cooper, R. and Kaplan, R.S. (1987) How cost accounting systematically distorts product costs, in Accounting and Management: Field Study Perspectives (eds W.H. Bruns and R.S. Kaplan ), Harvard Business School Press, Ch. 8.

Dean, J. F. (1949) Cost structures of enterprise and break-even techniques, American Economic Review , May, 150–60.

Dorward, N. (1986) The mythology of constant marginal costs, Accountancy , April, 98–102.

Gambling, T.E. (1965) Some observations on break-even budgeting and programming to goals, Journal of Accounting Research 3 (1), Spring, 159–65.

Ghosh, B.C. (1980) Fixed costs in break-even analysis, Management Accounting , May, 50–1.

Givens, H.R. (1966) An application of curvilinear break-even analysis, The Accounting Review , 41 (1), January, 141–3.

Goggans, T. (1965) Break-even analysis and curvilinear function, The Accounting Review , October, 867–871.

Hankinson, A. (1985) Output decisions of small engineering firms, Management Accounting , July/August, 38–9.

Hartl, R.J. (1975) The linear total revenue curve in cost-volume-profit analysis, Management Accounting , March, 49–52.

Johnston, J. (1972) Statistical Cost Accounting ,McGraw-Hill.

Klipper, H. (1978) Break-even analysis with variable product mix, Management Accounting (USA) , April, 51–4.

Manes, R. (1966) A new dimension to break-even analysis, Journal of Accounting Research , 4 (1), Spring, 87–100.

Martin, H. (1986) Breaking through the breakeven barriers, Management Accounting (USA) , May, 31–4.

Middleton, K. (1980) A critical look at break-even analysis, Australian Accountant , May, 264–8.

Richardson, A.W. (1978) Some extensions with the application of cost-volume-profit analysis, Cost and Management , September/October, 30–35.

Scapens, R.W. (1985) Management Accounting: A Review of Contemporary Developments , Macmillan, Ch. 5.

Sinclair, K.P. and Talbott, J.A. (1986) Using breakeven analysis when cost behaviour is unknown, Management Accounting (USA) , July, 52–6.

Singh, P.S. and Chapman, G.L. (1978) Is linear approximation good enough?, Management Accounting (USA) , January, 53–5.

Solomons, D. (1974) Break-even analysis under absorption costing, in Information for Decision-making (ed. A. Rappaport ), Prentice-Hall, pp. 100–104

Vickers, D. (1960) On the economics of break-even. The Accounting Review 35 (3), July, 405–12; also in Contemporary Issues in Cost and Management Accounting (eds H.R. Anton, P.A. Firmin, and H.D. Grove ), Houghton Mifflin (1978), pp. 272–82.

Wichmann, H. and Nix, H.M. (1985) Cost-volume-profit analysis for small retailers and service businesses, Cost and Management (Canada) , May/June, 31–5.

Wilson, J.D. (1972) Practical applications of cost-volume-profit analysis, in Contemporary Issues in Cost Accounting (ed. H.R. Anton and P.A. Firmin), Houghton Mifflin, pp. 260–74.

Download references

Author information

Authors and affiliations.

Huddersfield Polytechnic, UK

Colin Drury ( Reader in Accountancy and Finance )

You can also search for this author in PubMed   Google Scholar

Rights and permissions

Reprints and permissions

Copyright information

© 1992 J.C. Drury

About this chapter

Cite this chapter.

Drury, C. (1992). Cost-volume-profit analysis. In: Management and Cost Accounting. Springer, Boston, MA. https://doi.org/10.1007/978-1-4899-6828-9_9

Download citation

DOI : https://doi.org/10.1007/978-1-4899-6828-9_9

Publisher Name : Springer, Boston, MA

Print ISBN : 978-0-412-46390-7

Online ISBN : 978-1-4899-6828-9

eBook Packages : Springer Book Archive

Share this chapter

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Publish with us

Policies and ethics

• Find a journal
• Track your research

• Search Search Please fill out this field.
• Corporate Finance

Cost-Volume-Profit (CVP) Analysis: What It Is and the Formula for Calculating It

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

What Is Cost-Volume-Profit (CVP) Analysis?

Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that varying levels of costs and volume have on operating profit.

Key Takeaways

• Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm's profit.
• Companies can use CVP to see how many units they need to sell to break even (cover all costs) or reach a certain minimum profit margin.
• CVP analysis makes several assumptions, including that the sales price, fixed, and variable costs per unit are constant. 

Investopedia / Daniel Fishel

Understanding Cost-Volume-Profit (CVP) Analysis

The cost-volume-profit analysis, also commonly known as breakeven analysis, looks to determine the  breakeven point for different sales volumes and cost structures plotted on a profit-volume chart , which can be useful for managers making short-term business decisions. CVP analysis makes several assumptions, including that the sales price, fixed and variable costs per unit are constant. Running a CVP analysis involves using several equations for price, cost, and other variables, which it then plots out on an economic graph.

The CVP formula can also calculate the breakeven point. The breakeven point is the number of units that need to be sold or the amount of sales revenue that has to be generated in order to cover the costs required to make the product. The CVP breakeven sales volume formula is:

Breakeven Sales Volume = F C C M where: F C = Fixed costs C M = Contribution margin = Sales − Variable Costs \begin{aligned} &\text{Breakeven Sales Volume}=\frac{FC}{CM} \\ &\textbf{where:}\\ &FC=\text{Fixed costs}\\ &CM=\text{Contribution margin} = \text{Sales} - \text{Variable Costs}\\ \end{aligned} ​ Breakeven Sales Volume = CM FC ​ where: FC = Fixed costs CM = Contribution margin = Sales − Variable Costs ​

To use the above formula to find a company's target sales volume, simply add a target profit amount per unit to the fixed-cost component of the formula. This allows you to solve for the target volume based on the assumptions used in the model.

CVP analysis also manages product contribution margin. The contribution margin is the difference between total sales and total variable costs. For a business to be profitable, the contribution margin must exceed total fixed costs. The contribution margin may also be calculated per unit. The unit contribution margin is simply the remainder after the unit variable cost is subtracted from the unit sales price. The contribution margin ratio is determined by dividing the contribution margin by total sales.

The contribution margin is used to determine the breakeven point of sales. By dividing the total fixed costs by the contribution margin ratio, the breakeven point of sales in terms of total dollars may be calculated. For example, a company with $100,000 of fixed costs and a contribution margin of 40% must earn revenue of $250,000 to break even.

Profit may be added to the fixed costs to perform CVP analysis on the desired outcome. For example, if the previous company desired a profit of $50,000, the necessary total sales revenue is found by dividing $150,000 (the sum of fixed costs and desired profit) by the contribution margin of 40%. This example yields a required sales revenue of $375,000.

Special Considerations

CVP analysis is only reliable if costs are fixed within a specified production level. All units produced are assumed to be sold, and all fixed costs must be stable in CVP analysis. Another assumption is all changes in expenses occur because of changes in activity level. Semi-variable expenses must be split between expense classifications using the high-low method , scatter plot, or statistical regression.

How Is Cost-Volume-Profit (CVP) Analysis Used?

Cost-volume-profit analysis is used to determine whether there is an economic justification for a product to be manufactured. A target profit margin is added to the breakeven sales volume, which is the number of units that need to be sold in order to cover the costs required to make the product and arrive at the target sales volume needed to generate the desired profit. The decision maker could then compare the product's sales projections to the target sales volume to see if it is worth manufacturing.

What Assumptions Does Cost-Volume-Profit (CVP) Analysis Make?

The reliability of CVP lies in the assumptions it makes, including that the sales price and the fixed and variable cost per unit are constant. The costs are fixed within a specified production level. All units produced are assumed to be sold, and all fixed costs must be stable. Another assumption is all changes in expenses occur because of changes in activity level. Semi-variable expenses must be split between expense classifications using the high-low method, scatter plot , or statistical regression.

What Is Contribution Margin?

The contribution margin can be stated on a gross or per-unit basis. It represents the incremental money generated for each product/unit sold after deducting the variable portion of the firm's costs. Basically, it shows the portion of sales that helps to cover the company's fixed costs. Any remaining revenue left after covering fixed costs is the profit generated. So, for a business to be profitable, the contribution margin must exceed total fixed costs.

• Accounting History and Terminology 1 of 35
• Absorption Costing Explained, With Pros and Cons and Example 2 of 35
• What Is an Amortization Schedule? How to Calculate with Formula 3 of 35
• Average Collection Period Formula, How It Works, Example 4 of 35
• Bill of Lading: Meaning, Types, Example, and Purpose 5 of 35
• What Is a Cash Book? How Cash Books Work, With Examples 6 of 35
• Cost of Debt: What It Means and Formulas 7 of 35
• Cost of Equity Definition, Formula, and Example 8 of 35
• Cost-Volume-Profit (CVP) Analysis: What It Is and the Formula for Calculating It 9 of 35
• Current Account: Definition and What Influences It 10 of 35
• Days Payable Outstanding (DPO) Defined and How It's Calculated 11 of 35
• Depreciation: Definition and Types, With Calculation Examples 12 of 35
• Double-Declining Balance (DDB) Depreciation Method Definition With Formula 13 of 35
• EBITDA: Definition, Calculation Formulas, History, and Criticisms 14 of 35
• Economic Order Quantity: What Does It Mean and Who Is It Important For? 15 of 35
• 4 Factors of Production Explained With Examples 16 of 35
• Fiscal Year: What It Is and Advantages Over Calendar Year 17 of 35
• How a General Ledger Works With Double-Entry Accounting Along With Examples 18 of 35
• Just-in-Time (JIT): Definition, Example, and Pros & Cons 19 of 35
• Net Operating Loss (NOL): Definition and Carryforward Rules 20 of 35
• NRV: What Net Realizable Value Is and a Formula To Calculate It 21 of 35
• No-Shop Clause: Meaning, Examples and Exceptions 22 of 35
• Operating Costs Definition: Formula, Types, and Real-World Examples 23 of 35
• Operating Profit: How to Calculate, What It Tells You, and Example 24 of 35
• Production Costs: What They Are and How to Calculate Them 25 of 35
• What Is a Pro Forma Invoice? Required Information and Example 26 of 35
• Retained Earnings in Accounting and What They Can Tell You 27 of 35
• Revenue Recognition: What It Means in Accounting and the 5 Steps 28 of 35
• What Is a Sunk Cost—and the Sunk Cost Fallacy? 29 of 35
• Triple Bottom Line 30 of 35
• Variable Cost: What It Is and How to Calculate It 31 of 35
• Work-in-Progress (WIP) Definition With Examples 32 of 35
• Write-Offs: Understanding Different Types To Save on Taxes 33 of 35
• Year-Over-Year (YOY): What It Means, How It's Used in Finance 34 of 35
• Zero-Based Budgeting: What It Is and How to Use It 35 of 35

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

Academia.edu no longer supports Internet Explorer.

To browse Academia.edu and the wider internet faster and more securely, please take a few seconds to  upgrade your browser .

Enter the email address you signed up with and we'll email you a reset link.

• We're Hiring!
• Help Center

Absorption(Variable) Costing and Cost-Volume-Profit Analysis

Related Papers

BRAND. Broad Research in Accounting, Negotiation, and Distribution

Academia EduSoft

This paper will investigate the controversy that is innate between the two costing techniques; Absorption Costing and Marginal Costing and would throw light on which costing technique better serves its purpose in helping management for decision making process and if Marginal Costing technique is concluded as better technique then why it should not be used for external reporting purpose. This paper will only crystallize and highlight the issues descriptively and will not resolve the issues that are inherent between the two costing techniques. The unique thing about this paper is that it is in favor of treating fixed cost as product cost that is it is supporting the advocates of Absorption Costing Technique but it is against to consider profit as a function of production rather it believes that profit should only be considered as function of sales for stock valuation and to help management in decision making process that is, regarding this point it is supporting advocates of Marginal Costing. Introduction Accounting figures just show current scenario of an organization. But if we want to understand the basics of these accounting figures we still need to understand Management Accounting Techniques. The intention of accounting by and large portrayed the course of providing information to owners, creditors, governmental regulatory agencies, and operating management. In an extensive sense, accounting helps in assistance of the economic resources management (Seiler, 1959). So, accounting encompasses collection and measurement of financial data and presents this to relevant parties who are engage in decision making process. (Chandra and Paperman, 1976) Despite having knowledge of all these techniques we still left at a place where we need to think which technique in a more excellent manner gratifies our need, help management in decision making process and also more importantly; fulfills the constraints, demands and needs of International Accounting Standards as well as regulatory agencies and tax authorities. Marginal Costing and Absorption Costing (the subject under discussion) are two such accounting practices and there is an innate controversy that born with the birth of Marginal costing technique that which technique better fulfills the purpose of management in decision making process. (Chandra and Paperman, 1976) For external reporting purpose, the difference between the techniques is very critical and important. The profit reported by two techniques is altogether different in many cases and so it affects critically decision making process of management (Ijiri et al., 1965; fremgen, 1962). The controversy is the valuation of stock either by including fixed overhead cost or not and if the stock is valued exclusive of fixed overhead cost whether it should be presented externally? (Chandra and Paperman, 1976) The objective of this paper is to throw light on the usage of two accounting techniques and to determine which technique better serves its purpose to aid management in decision making

SSRN Electronic Journal

bjorn franck Jorgensen

Bulend Terzioglu

In the early 1920s, direct labour comprised most of the total cost of manufacturing, and allocating overheads using direct labour hours or direct labour cost was sufficient for inventory valuation purposes, which was then the primary object of cost accounting. However, the upsurge of manufacturing overhead as a percentage of manufacturing cost at the expense of direct labour and proliferation of product lines complicated the otherwise relatively straightforward process of overhead cost allocation. Empirical evidence demonstrates that our understanding of how best to allocate overheads is at a nascent stage, and surprisingly most managers still do not know their costs. Moreover, managers have grave concerns about the current practice that allocates overheads to products in an arbitrary fashion. These concerns stem from the fact that managerial decisions are based on cost information furnished by management accountants, which is ostensibly inaccurate. This conceptual discussion paper ...

Samuel Benjamin

carmen sirbu

The cost of activities stand for one of the most important sources of information, making possible for the whole operation process to be examined in its all stages, starting with ensuring the technical operational documentation and the necessary resources and ending with product delivery or service commitment.Costs influence the process of making economic and financial decision in many ways, the most significant being: the costs-price relationship, the costs-profit relationship, the costs-economic efficiency relationship and so on.It is necessary for costs to be presented in the most accurate, accessible and thorough manner that should allow managers to make quick and correct decisions, subsequent to receiving brief, exact and economically real as well as relevant cost information.

rupesh tembhare

IAEME Publication

Product costs are a significant determinant of both short-term and long-term decisions of businesses in terms of goal achievement. In determining the costs, businesses are expected to consider both the characteristics of the market (demand) and the business itself. Product costs are calculated by cost calculation methods. Cost calculation methods are normal costing method, full costing, variable costing. Full costing treats the costs of all manufacturing components (direct material, direct labor, variable factory overhead and fixed factory overhead) as inventoriable, or product, costs. Variable costing is a cost accumalition method that includes only variable production costs (direct materal, direct labor and variable factory overhead) as inventoriable, or product, cost. Normal costing method takes into account all the variable parts of production costs. The method handles fixed operating costs according to the rate of capacity utilization. In this study, the effects of choosing either full costing , variable costing or normal costing on costs in terms of varying amounts of production are analyzed

Journal of Accounting Education

Andy García

International Journal of Economics and Business Administration

Prodromos Chatzoglou