Break‐even and Contribution Margin Analysis: Profit, Cost, and Volume Changes

This chapter discusses the break-even and contribution margin analysis, also known as cost-volume-profit (CVP) analysis, which shows how profit and costs change with a change in volume. CVP looks at the effects on profits of changes in factors such as variable costs, fixed costs, selling prices, volume, and mix of products sold. By studying the relationships of costs, sales, and net income, management is able to cope with many planning decisions. Break-even analysis determines the break-even sales. The break-even point represents the level of sales revenue that equals the total of the variable and fixed costs for a given volume of output at a particular capacity use rate. The chapter discusses how the traditional contribution analysis can be applied to the profit and non-profit setting and how managers can prepare the income statement in a contribution format, which organizes costs by behavior rather than by the functions of manufacturing, sales, and administration.