How Do You Calculate Cost Volume Profit?
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
