How to Calculate Cost Volume Profit

by Carter McBride - Updated September 26, 2017
Calculating cost volume profit helps a company set sales goals.

Cost volume profit is an analysis that helps companies determine their break-even point and required sales. This helps companies set sales goals. The most important concepts in determining the cost volume profit are fixed costs, or costs that do not change with a change in production, such as rent; and variable costs, or costs that do change when the level of production changes, such as employee pay.

Determine the contribution margin by subtracting variable costs from sales. For example, a company that has $500,000 in sales and $210,000 in variable costs then has a contribution margin of $290,000.

Divide the contribution margin by the number of units sold to determine contribution margin per unit. In our example, if the Firm sells 300,000 units, then $290,000 divided by 300,000 equals $0.97.

Divide the contribution margin by sales to determine the contribution margin ratio. In our example, $290,000 divided by $500,000 equals 58 percent.

Divide the total fixed costs by the contribution margin ratio to determine the break-even point in sales dollars. In our example, if the firm has $100,000 in fixed costs, then $100,000 divided by 58 percent equals $172,413.80. The firm must sell $172,413.80 to not lose money.

Divide the total fixed costs by the contribution margin per unit to determine the break-even point in units sold. In our example, $100,000 divided by $0.97 equals 103,093 units that the company must sell to remain in the black.

Add fixed costs to the firm's target income for the period, then divide by the contribution margin ratio to determine required sales in dollars. If the firm wants $200,000 in income, then $200,000 plus $100,000 equals $300,000. Then $300,000 divided by 58 percent equals $517,241.38 in sales to meet the company's target income.

Add fixed costs to the firm's target income for the period, then divide by the contribution margin per unit to determine required sales in units. In our example, $100,000 plus $200,000 equals $300,000. Then $300,000 divided by $0.97 equals 309,279 units that the firm needs to sell to reach its target profit.

About the Author

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.

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