Cost-Volume-Profit Analysis for Single-Product Companies
The profit equation can be expressed as Profit = total revenues – (total variable costs + total fixed costs). Companies can use this equation to determine their break-even points, volume levels, and evaluate how changes in any one factor can impact the overall outcome. Additionally, it is important for companies to identify the contribution margin, which is the amount each unit sold contributes to fixed costs and profit increases. It is particularly interesting to note that airlines measure their break-even points as load factors, which is the percentage of seats that are filled. Because of this, it is essential that airlines operate efficiently to lower their break-even points, and fill as many seats as possible on all of their flights. At the end of this section, you should be able to recognize the relationship between costs, profits, and volume levels and how small changes in any one element can result in big differences in the outcome.