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Cost-Volume-Profit (CVP) Analysis

Suppose the following income statement represents our performance last month, and we’re predicting that sales volume will drop by 10%. Will our profits also go down by approximately 10% to $3,600? The answer is almost certainly not, even if our underlying cost structure remains the same. In fact, we’re likely to do far worse than $3,600.

The estimate that profits will drop 10% implicitly assumes that all our costs move proport...


Cover of Financial Literacy for Managers: Finance and Accounting for Better Decision-Making


It’s important to understand the link between costs, sales volume, and profits before making decisions about what new projects and products to pursue or how to change existing products or processes.