This document outlines the objectives of cost-volume-profit analysis, which are: 1) To identify how changes in volume affect costs and their different types (variable, fixed, mixed). 2) To use cost-volume-profit analysis to compute the breakeven point, which is the sales level where a company earns neither a profit nor loss. 3) To ascertain the relationship between cost, profit, and volume in order to accurately forecast profits. 4) To assist in evaluating performance for control purposes. 5) To help formulate pricing policies by projecting the effects of different price structures on cost and profit.

1. Objectives of Cost-Volume-
Profit Analysis
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2. Objective 1
 Identify how changes in volume affect
costs.

3. Total Variable Cost
Total variable costs change
when activity changes.
Total Long Distance
Your total long distance
Telephone Bill
telephone bill is based
on how many minutes
you talk.
Minutes Talked

4. Variable Cost Per Unit
Variable costs per unit do not change
as activity increases.
The cost per long
Telephone Charge
distance
Per Minute
minute talked is
constant.
For example, 10
cents per minute.
Minutes Talked

5. Variable Costs Example
Consider Grand Canyon Railway.
 Assume that breakfast costs Grand
Canyon Railway $3 per person.
 If the railroad carries 2,000 passengers,
it will spend $6,000 for breakfast
services.

6. Variable Costs Example
$24 –
$18 –
$12 –
$6 –
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0 1 2 3 4 5
Volume
(Thousands of passengers)
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7. Total Fixed Cost
Total fixed costs remain unchanged
when activity changes.
Your monthly
basic
Telephone Bill
Monthly Basic
telephone bill
probably
does not change
when
you make more
Number of Local Calls local calls.

8. Mixed Costs
 Contain fixed portion that is incurred
even when facility is unused & variable
portion that increases with usage.
 Example: monthly electric utility charge
 Fixed service fee
 Variable charge per kilowatt hour used

9. Objective 2
 Use CVP analysis to compute
breakeven point.

10. Computing Break-Even Point
The unique sales level at which a
company earns neither a profit nor
incurs a loss.
Sales – Variable Costs – Fixed Costs = 0

11. Objective 3
 In order to forecast profits accurately, it
is essential to ascertain the relationship
between cost and profit on one hand
and volume on the other.

12. Objective 4
 Cost-volume-profit analysis assist in
evaluating performance for the purpose
of control

13. Objective 5
 It helps the management in formulating
pricing policies by projecting the effect
of different price structures on cost and
profit.
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