Overview

Cost-volume-profit analysis (CVP analysis), also commonly referred to as breakeven analysis, is a method to evaluate how profitability is impacted by a company's variable costs, fixed costs, and sales volume. The company can use this information to determine the number of units needs to be sold in order to break even or reach the margin of safety. A CVP analysis consists of multiple components: 

  1. Contribution margin (CM) ratio and variable expense ratio CM Ratio = Contribution Margin / Revenue 
  2. Breakeven point (BEP) in units or dollars BEP = Fixed Costs / CM Per Unit 
  3. Margin of safety: Margin of Safety = Actual Sales - Breakeven Sales
  4. Changes in net income # of Units = (Fixed Costs + Target Net Income) / CM Ratio 
  5. Degree of operating leverage (DOL) DOL = CM / Net Income
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