If you have a business that sells several products, do you know which products are making the greatest profit? What about which products are losers? Have you calculated the breakeven points for each one of them?

If you don't have quick answers to these questions, you should do a cost-volume-price (CVP) analysis on your product mix.

## What Is a Cost-Volume-Profit Analysis?

• Sales Price: \$110
• Variable Cost: \$60/pair
• Contribution Margin: \$50/pair
• Sales Units: 1,000 pairs/month
• Sales: \$50,000/month
• Monthly Profit Contribution: \$50,000/month
:

## Sales Strategies

The obvious strategy is to maximize sales of the product that makes the highest profit. But first, you have to know which products to promote.

With Hasty Rabbit, their new model, the Blazing Hare, has the highest contribution margin of \$50/pair. Therefore, it would make sense for the business to spend money on marketing and sales programs to sell more of this model.

This doesn't mean that the company would neglect their less profitable models, but the emphasis would go toward the higher profit styles.

## Profit Planning

Every company must have a plan on how it intends to achieve a specific profit amount. Without a plan, profits are left to chance after paying all the expenses. That's not managing a business.

Hasty Rabbit has the information it needs from the CVP analysis to prepare a profit plan. The company has annual sales of \$3.3 million and a total monthly contribution margin from both models of \$150,000 or \$1.8 million/year. A target profit margin of 6 percent of sales would be \$198,000 (6 percent times \$3.3 million). This calculation establishes the overhead budget at \$1,602,000 (contribution margin of \$1.8 million minus profit of \$198,000).

## Cost Control

For Hasty Rabbit, the overhead budget of \$1,602,000 can be allocated to various overhead expenses such as:

• rent
• utilities
• insurance