Introduction to Profitability Analysis

What you’ll learn to do: use the contribution margin model for Cost-Volume-Profit analysis

The basis for Cost-Volume-Profit (CVP) analysis is the Contribution Margin Income Statement:

You can view the transcript for “Contribution Margin Income Statement” here (opens in new window).

Let’s revisit BlankBooks. From the accounting records, you were able to build this CVP model based on the company producing an estimated 2,500 units in July:

BlankBooks, Inc.
CVP Analysis
For the month ending July 31, 20XX
Units $/Unit Total
Sales 2,500 $     10.00 $   25,000.00
Variable costs 2,500 $      8.30 20,750.00
Contribution Margin $      1.70 Single Line4,250.00
Fixed costs $    3,400.00
Operating income Single Line$      850.00Double line
CM ratio 17.00%

 

But now what?

Managers use the CVP analysis for planning, for making projections, and for decision-making purposes. They use the model to calculate a break-even sales volume, to figure out the sales volume required to reach a certain target profit, and to run “what-if” scenarios. In this section, you’ll be learning exactly how to use this tool to accomplish those tasks.

If you’d like to use Excel, Numbers, Google Sheets, or some other spreadsheet program for your analysis, here is a sample of the template with formulas (from Microsoft® Excel for Mac version 16.44):

Example of an Excel Sheet

When you are done with this section, you will be able to:

  • Calculate break-even point
  • Calculate target profit
  • Demonstrate how changes in cost, volume, and selling price affect profit
  • Calculate margin of safety
  • Calculate operating leverage
  • Calculate multiple product break-even points

Learning Activities

The learning activities for this section include the following:

  • Reading: Break-Even
  • Self Check: Break-Even
  • Reading: Target Profit
  • Self Check: Target Profit
  • Reading: Sensitivity Analysis
  • Self Check: Sensitivity Analysis
  • Reading: Margin of Safety
  • Self Check: Margin of Safety
  • Reading: Operating Leverage
  • Self Check: Operating Leverage
  • Reading: Sales Mix
  • Self Check: Sales Mix