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    Cost-Volume-Profit Analysis and Operating Leverage

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    What are the aims, usefulness, and shortcomings of the following:
    a) cost-volume-profit analysis
    b) the concept of operating leverage

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    Solution Preview

    CVP analysis attempts to identify revenue and cost factors in order to gain an idea of when and where profit will be incurred. It begins with the basic formula of PROFIT = Revenue - Costs. Taken a step further, it delineates costs into two categories, fixed and variable costs. Fixed costs are incurred if we sell a million units or no units --- they will happen as a result of opening our doors for the conduct of business.

    Fixed costs + Variable Costs = Total Costs. At the point where total costs = the revenue from sales, we have established a ...

    Solution Summary

    These questions provide insight into the relationship between profitability and the use of financial leverage.