CASE 2: Cost–Volume–Profit Analysis

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Module 2 - Background

COST-VOLUME-PROFIT ANALYSIS

Modular Learning Objectives

Keep the following objectives in mind as you work through the material in this module:

· Define of cost-volume-profit.

· Understand the relationship between variable costing and cost-volume-profit analysis.

· Apply and analyze break-even.

· Compute break-even in units.

· Compute break-even in sales.

· Analyze target profit.

Required Reading

Variable and fixed costs were introduced in the prior module. Now it is time to examine cost behavior in more detail by familiarizing yourself with the following while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail.

Check Your Understanding

Check your understanding to make sure that you have a good grasp of the background material. If you are not comfortable with the concepts, review some of the material again or go to the optional resource for more examples.

Click on the quiz icon for an ungraded, 20-question true-or-false self-study quiz to check your progress. If you are not satisfied with the score, review some of the material again. For more in-depth information, review materials listed under optional reading at the bottom of this page.

Final Thoughts

Cost-Volume-Profit (CVP) analysis is a computational method that analyzes the effect of sales and product costs on the operating income of a business. Specifically, it assesses the effect of changes in variable costs, fixed costs and selling price on operating income. Break-even analysis (with or without a target profit) is a common CVP approach. Another definition of break-even is where the total contribution margin equals total costs. A contribution margin income statement shows zero income at break-even.

Several assumptions underlie CVP analysis:

· All cost can be categorized as variable or fixed.

· Sales price per unit, variable cost per unit, and total fixed cost are constant.

· Mixed costs must be split into their fixed and variable component by an estimation process.

· Understanding the behavior of costs makes cost-volume-profit analysis possible.

Optional Reading

For further detail refer to Dr. Walther’s accounting text and videos.

Walther, L. (2017). Chapter 18: Cost-Volume-Profit and Business Scalability .