• Latest
  • Trending
  • All

Cost Volume Profit Analysis – What Is It All About?

December 1, 2019
These inventory trackers will notify you when hard-to-find items are back in stock

These inventory trackers will notify you when hard-to-find items are back in stock

April 15, 2020
Antonov An-225 Mriya: world’s largest cargo plane, history, details

Antonov An-225 Mriya: world’s largest cargo plane, history, details

April 15, 2020
Coronavirus | Punjab all set for wheat procurement within lockdown norms

Coronavirus | Punjab all set for wheat procurement within lockdown norms

April 14, 2020
Copperstate Farms Launches International Cannabis Brand DNA Genetics in Arizona Market

Copperstate Farms Launches International Cannabis Brand DNA Genetics in Arizona Market

April 14, 2020
Mzee Moi’s Ksh10B Gift to Gideon

Mzee Moi’s Ksh10B Gift to Gideon

April 14, 2020
Covid Knights: Corporate social purpose in the time of COVID-19

Covid Knights: Corporate social purpose in the time of COVID-19

April 14, 2020
How Tesla And BMW Are Leading A Supply Chain Renaissance With Blockchain

How Tesla And BMW Are Leading A Supply Chain Renaissance With Blockchain

April 14, 2020
Last Mile Delivery Market Worth Observing Growth | UPS, FedEx, SF Express

Last Mile Delivery Market Worth Observing Growth | UPS, FedEx, SF Express

April 14, 2020
LATAM Cargo strengthens European cargo links

LATAM Cargo strengthens European cargo links

April 14, 2020
Labour a worry as Punjab prepares for procurement | Chandigarh News

Labour a worry as Punjab prepares for procurement | Chandigarh News

April 14, 2020
Ford making reusable hospital gowns from airbag materials as efforts against coronavirus expand

Ford making reusable hospital gowns from airbag materials as efforts against coronavirus expand

April 14, 2020
Don’t Sweat NBC’s Decision to Cut Back on Television Ad Inventory

Don’t Sweat NBC’s Decision to Cut Back on Television Ad Inventory

April 14, 2020
  • Supply Chain
  • Logistics
  • Warehousing
  • Procurement
  • Shipping
  • More
    • Strategic Sourcing
    • Spend Analysis
    • Inventory
    • Contact Us
No Result
View All Result
United States International Supply Chain Commission
United States International Supply Chain Commission
Home Spend Analysis

Cost Volume Profit Analysis – What Is It All About?

by usiscc
December 1, 2019
in Spend Analysis
0
495
SHARES
1.4k
VIEWS
Share on FacebookShare on Twitter

Introduction

Running a successful small business requires adept navigation of the many choices created by an ever changing market place. Cost Volume Profit Analysis (CVPA) is an effective tool that can help its user answer important questions such as “what price should I charge for this product or that service?”, “which of my products or services is most profitable?”, and “what is the best operating leverage level for my business given current market conditions?”

Understanding Fixed, Semi-Variable, and Variable Costs

Before the CVPA can be used, fixed, semi-variable and variable costs must be determined. Determining these costs is a very useful tool in itself, but that’s another white paper.

Fixed costs are those costs that your business incurs regardless of sales volume. These are costs such as rent, insurance, and annual business licensing fees. Sales volume, not exceeding your current capacity, has no effect.

Variable costs are those costs that are directly affected by sales volume. These include items such as cost-of-goods sold, sales commissions, and travel expenses, if you are a service provider that travels as a result of service provision.

Semi-variable costs, as you have determined by now, are those costs that increase with sales volume but not directly as with variable costs. An example of a semi-variable cost for an auto body shop might be equipment maintenance expense. At some point, equipment begins to break down if not maintained at a level consistent with increased use. Therefore, in order to avoid equipment breakdown due to hyper-use, the business owner must spend additional funds on maintaining equipment.

Break-Even

There are several benefits to using CVPA. First, it shows what the break-even point, in units or dollars, for a given product or service is, given a specified sales price. Break-even is the point at which sales revenue covers all fixed costs for the year plus all variable costs up to that sales point. For example, if fixed costs for the year are $1,000, variable costs per unit total $1.00, and the product is priced at $5.00, then 250 units must be sold to cover fixed and variable costs totaling $1,250.

As you may have noticed, not only does CVPA show break-even, but it can be used for analyzing price sensitivity. For instance, if your competitor is able to price the same product at $2.50, but you are not able to go below $3.00, then it may be time to consider several options: discontinue the product, find a way to reduce fixed and variable costs so you can price it at $2.50, tweak the product in some way that distinguishes it in a positive way from your competitor’s-a square hamburger vs. a round hamburger-or use the product as a “loss leader” to get customers in the door.

Contribution Margin

Determining the contribution margin for your business is an additional benefit of CVPA. Contribution margin is simply the amount of each sales dollar left after all variable costs have been covered. It is that portion of the sales dollar that can be devoted to covering fixed costs.

Knowing your overall contribution margin is beneficial because it can be compared to prior periods to determine if it is trending positively or negatively. Additionally, contribution margin analysis can be applied to individual products, product lines, services, or service lines. Knowing the contribution margin of a particular product or service can help determine if carrying that product or performing that service over another is the best decision. Moreover, understanding contribution margin is very helpful in developing the best pricing strategy for your business.

One final benefit to knowing how to determine contribution margin is that it can point out your most profitable products or services, even though sales may indicate something different. For example, if product A has sales of $100K and product B has sales of $80K, it would appear, based on total sales alone, that product A is the more attractive product to emphasize. But a quick contribution margin analysis reveals that product B contributes 0.49 cents of every sales dollar to covering fixed costs vs. product A’s 0.34 cents. Clearly, product B is a real contributor and should be part of this retailer’s product mix.

Operating Leverage

In gaining an understanding of operating leverage, let’s reconsider our hypothetical auto body shop owner. She has seen her maintenance and service expense increase because of all the additional use her machinery is getting due to a recent and significant up-trend in sales.

She is faced with a decision: should she invest in additional fixed assets to handle the additional sales volume or just continue with her current fixed asset platform?

Without understanding operating leverage, this business owner doesn’t have valuable information that could help her make the best decision. Operating leverage is the degree to which a business uses fixed costs to generate profit. The greater the degree of fixed cost reliance, the greater the increase in profits during a sales up-trend and the greater the loss in a sales down-trend.

As fixed assets usually carry fixed costs, financed payments for the equipment, additional insurance, etc., investing in additional equipment is something our auto body shop owner will want to seriously consider if the up-ward sales trend she is experiencing is something she believes to a be long-term phenomenon. If she believes the sales up-trend to indeed be long-term, then investing in additional fixed assets may be just the thing for her to do.

CVPA is one tool our auto body shop owner can use to help her determine what to do in this situation. By using her break-even model and considering contribution margins, she can perform sensitivity analyses to help her determine whether or not to increase her operating leverage in an effort to take advantage of a sales up-trend.

Summary

CVPA is a tool that can be used to help answer questions you may have about pricing your products and services, whether or not to invest in additional capital items, and which products and services to emphasize. While there is no one magic bullet, CVPA is a nice tool to have in your business analysis bag to help you make good decisions when answering these types of questions.

Share198Tweet124Share50
usiscc

usiscc

  • Trending
  • Comments
  • Latest
Antonov An-225 Mriya: world’s largest cargo plane, history, details

Antonov An-225 Mriya: world’s largest cargo plane, history, details

April 15, 2020
3 keys to mitigating severe supply shortages from coronavirus disruption

3 keys to mitigating severe supply shortages from coronavirus disruption

March 18, 2020
Corteva responding to changes in agriculture supply chain | 2020-03-06

Corteva responding to changes in agriculture supply chain | 2020-03-06

March 6, 2020
These inventory trackers will notify you when hard-to-find items are back in stock

These inventory trackers will notify you when hard-to-find items are back in stock

0
Global Industry Analysis, Size, Share, Growth, Trends, and Forecasts 2016–2024 – ZMR News Reports

Global Industry Analysis, Size, Share, Growth, Trends, and Forecasts 2016–2024 – ZMR News Reports

0
PHOTOS: Ottawa firefighters respond to warehouse fire

PHOTOS: Ottawa firefighters respond to warehouse fire

0
These inventory trackers will notify you when hard-to-find items are back in stock

These inventory trackers will notify you when hard-to-find items are back in stock

April 15, 2020
Antonov An-225 Mriya: world’s largest cargo plane, history, details

Antonov An-225 Mriya: world’s largest cargo plane, history, details

April 15, 2020
Coronavirus | Punjab all set for wheat procurement within lockdown norms

Coronavirus | Punjab all set for wheat procurement within lockdown norms

April 14, 2020
  • Privacy Policy
  • Terms of Use
  • Disclaimer
  • DMCA
  • Contact Us

Copyright © 2021 United States International Supply Chain Commission (usiscc.org)

No Result
View All Result
  • Supply Chain
  • Logistics
  • Warehousing
  • Procurement
  • Shipping
  • More
    • Strategic Sourcing
    • Spend Analysis
    • Inventory
    • Contact Us

Copyright © 2021 United States International Supply Chain Commission (usiscc.org)

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Cookie settingsACCEPT
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.