Cost-Volume-Profit Analysis

When considering a decision to enter a new commercial activity (e.g., opening a restaurant), questions frequently posed by managers include ‘‘How many units will we need to sell in order to breakeven?’’ and ‘‘How much will we need to sell in order to achieve our target profit level?’’. Other questions that sometimes arise in connection with existing activities include ‘‘What will happen to profit if we manage to increase sales volume by 10%?’’ and ‘‘If we increase advertising by 15%, how much more would we have to sell in order to maintain our current level of profit?’’. This chapter outlines an analytical approach that will enable you to answer these types of questions. This approach is generally referred to as ‘‘cost-volume-profit’’ (CVP) analysis.