Cost-Volume-Profit Analysis
When a new retail store opens in your neighbourhood strip mall, you wonder whether it will still be running six months or a year from now. Do the owners know how much merchandise they have to sell to cover their costs? Will any money be left over to help grow the business?
Many new businesses fail. Why? Economic conditions, the fierceness of competition, changing consumer tastes, or even changes in taxes all contribute to the problem, but one of the most common reasons businesses fail is poor tracking of their basic financial numbers. So, if you want your own business to succeed, you need to understand its financial side. You need to be able to answer questions like the following.
- How does the money leave the business through costs and expenses?
- How does the money come into the business through revenue, which is determined by both the price tags on the merchandise and the volume at which that merchandise sells?
- What is the minimum amount of revenue that is needed to cover the costs?
- What is the resulting profitability of the business?
This chapter introduces the global model of the relationship between costs and revenues. It shows the overall cost structure of a business and introduces models for developing total costs and total revenues. It explains how you calculate net income and contribution margins. Armed with all of this knowledge, you can then answer the break-even question: How much does the business need to sell to cover its costs?
Attribution
“Chapter 5 Introduction” from Business Math: A Step-by-Step Handbook (2021B) by J. Olivier and Lyryx Learning Inc. through a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License unless otherwise noted.
“Chapter 5 Introduction” from Introduction to Business Math by Margaret Dancy is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
