CVP analysis, or cost-volume-profit analysis, is used in managerial accounting to use the relationships between cost, volume and profit to quickly calculate metrics that provide insight into the current and future performance of a business. Small-business owners can find CVP analysis useful, as it is mathematically simple, but it provides information that would otherwise require the production of an entire budgeted income statement. Learning CVP analysis techniques can save small-business managers a good deal of time without any loss of information.

Break-Even Analysis

One of the most common CVP analysis techniques is break-even analysis. When a small-business owner conducts a break-even analysis, he is determining the level of sales or units sold that would result in exactly zero profit. While zero profit is rarely a goal of small-business owners, knowing what level of sales results in break-even can be useful. For example, once a company reaches the break-even point in sales, the company has made enough money to cover all of the firm's fixed expenses. Therefore, each additional dollar of sales contributes a set amount to overall profit.

Target Profit

Companies often use CVP analysis to determine the level of sales needed to make a target profit. This is especially common as small-business owners determine if the profits from the business are large enough for the owner to quit an outside job. Small-business owners who use target-profit analysis for this purpose should be careful. CVP techniques assume that fixed costs do not change and that product sales levels stay the same. If these assumptions are not correct, then the reliability of the analysis is suspect.

Margin of Safety

The margin of safety is the number of units, sales dollars or percentage of sales dollars above the point that a company breaks even. In general, companies are looking for a margin of safety that is as large as possible. A declining margin of safety over time tells small-business owners that costs are increasing, sales are decreasing or both. As such, it is relatively common to see the margin of safety calculated on a regular basis and plotted over time.

Evaluation of Alternatives

CVP analysis can also be used to evaluate alternative actions quickly. For example, a company may be deciding whether to sponsor a charity event. The company's marketing department predicts that sponsorship of the event will increase sales by 10 percent for the next period, cost $5,000 and decrease the cost of another marketing program. With this information, CVP analysis can be used to examine how these pieces separately affect company profits. Without these techniques, managers can still produce budgeted financial statements to analyze the decision, but the process is much more cumbersome.


  • Managerial Accounting; Ray Garrison et al.