Profit-volume chart

A profit-volume chart is a graphical representation of the relationship between the sales and profits of a business. The concept is especially useful for determining the breakeven point of a business, where the sales level generates a profit of exactly zero. Breakeven information is critical for adjusting the expenditure and margin levels of a business to improve the probability that it will earn a profit. A profit-volume chart can also be used to estimate the profit that will likely be earned based on a certain sales level.

The managers of a business should have an especially high familiarity with the entity's profit-volume chart when the firm has a high fixed cost level. The reason is that the company must attain a high sales volume just to earn enough money to cover fixed costs. If sales drop below this breakeven level, a high fixed-cost business could lose a substantial amount of money.

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Financial Analysis