Cost
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Cost-Volume-Profit Analysis
Learning Objectives
1. Explain the features of cost-volumeprofit (CVP) analysis 2. Determine the breakeven point and output level needed to achieve a target operating income 3. Understand how income taxes affect CVP analysis 4. Explain how managers use CVP analysis in decision making 5. Explain how sensitivity analysis helps managers cope with uncertainty 6. Use CVP analysis to plan variable and fixed costs 7. Apply CVP analysis to a company producing multiple products
All managers want to know how profits will change as the units sold of a product or service change.
Home Depot managers, for example, might wonder how many units of a new product must be sold to break even or make a certain amount of profit. Procter & Gamble managers might ask themselves how expanding their business into a particular foreign market would affect costs, selling price, and profits. These questions have a common “what-if” theme. Examining the results of these what-if possibilities and alternatives helps managers make better decisions. Managers must also decide how to price their products and understand the effect of their pricing decisions on revenues and profits. The following article explains how the Irish rock band U2 recently decided whether it should decrease the prices on some of its tickets during its recent world tour. Does lowering ticket price sound like a wise strategy to you?
How the “The Biggest Rock Show Ever” Turned a Big Profit1
When U2 embarked on its recent world tour, Rolling Stone magazine called it “the biggest rock show ever.” Visiting large stadiums across the United States and Europe, the Irish quartet performed on an imposing 164-foot high stage that resembled a spaceship, complete with a massive video screen and footbridges leading to ringed catwalks. With an ambitious 48-date trek planned, U2 actually had three separate stages leapfrogging its global itinerary—each one costing nearly $40 million dollars. As a result,
Cost-Volume-Profit Analysis
Learning Objectives
1. Explain the features of cost-volumeprofit (CVP) analysis 2. Determine the breakeven point and output level needed to achieve a target operating income 3. Understand how income taxes affect CVP analysis 4. Explain how managers use CVP analysis in decision making 5. Explain how sensitivity analysis helps managers cope with uncertainty 6. Use CVP analysis to plan variable and fixed costs 7. Apply CVP analysis to a company producing multiple products
All managers want to know how profits will change as the units sold of a product or service change.
Home Depot managers, for example, might wonder how many units of a new product must be sold to break even or make a certain amount of profit. Procter & Gamble managers might ask themselves how expanding their business into a particular foreign market would affect costs, selling price, and profits. These questions have a common “what-if” theme. Examining the results of these what-if possibilities and alternatives helps managers make better decisions. Managers must also decide how to price their products and understand the effect of their pricing decisions on revenues and profits. The following article explains how the Irish rock band U2 recently decided whether it should decrease the prices on some of its tickets during its recent world tour. Does lowering ticket price sound like a wise strategy to you?
How the “The Biggest Rock Show Ever” Turned a Big Profit1
When U2 embarked on its recent world tour, Rolling Stone magazine called it “the biggest rock show ever.” Visiting large stadiums across the United States and Europe, the Irish quartet performed on an imposing 164-foot high stage that resembled a spaceship, complete with a massive video screen and footbridges leading to ringed catwalks. With an ambitious 48-date trek planned, U2 actually had three separate stages leapfrogging its global itinerary—each one costing nearly $40 million dollars. As a result,