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Chapter 3

Using Cost-Volume-Profit Analysis to Plan Your Business Results

In This Chapter

Using the breakeven point to forecast desired sales and profit

Computing contribution margin to cover fixed costs

Determining sales to achieve a target net income

Deciding whether or not to advertise

Changing the sale price to increase profit

Cost-volume-profit analysis (CVP) is a tool you can use to analyze your costs and plan for a reasonable profit. The CVP formula is simple, and using it is as easy as plugging in numbers as assumptions and seeing where your profit ends up.

Cost-volume-profit works for enterprises of all sizes. Take the neighborhood lemonade stand as an example. To set up a lemonade stand on the sidewalk, you’ll have costs. (“It takes money to make money.”) Those costs include lemons, sugar, water, stand construction, advertising, and so on.

Assume your lemonade stand startup costs total \$30. You decide to sell each glass of lemonade for \$1. How many glasses do you need to ...

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