Join Jim Stice for an in-depth discussion in this video What-if analysis for multiple scenarios, part of Running a Profitable Business: Calculating Breakeven.
- Now we are comfortable with the CVP equation,…we understand the relationship between revenues,…variable costs, fixed costs and profits,…we can compute breakeven points,…we can compute the level of sales required…to achieve a certain target net income,…and we can evaluate the likelihood…of achieving those levels.…Now we can start to do all sorts…of what-if sensitivity analysis.…If an increase in the selling price of an item by 10%…will decrease the sales by only five, should we do it?…If we can decrease our fixed cost by $10,000…with a resulting increase in our variable cost…of 20 cents per unit, what will happen to our profits…at our current sales levels?…What will happen to profitability in that case…if we can increase our sales by 10%?…A company can often trade fixed costs for variable costs…and vice versa.…
For example, rather than hire a sales rep on a salary…as a fixed cost, we might consider…more of a commission-type arrangement, a variable cost.…There are situations when that would be…in the best interest of the business…
Want to learn more? Learn about three types of accounting—financial, managerial, and income tax—in their Accounting Fundamentals course.
- Breaking down fixed and variable costs
- Pricing a service to cover costs
- Identifying high contribution margins
- Calculating a company's breakeven point
- Conducting breakeven analysis with breakeven equations
- Computing target net income
- Exploring sensitivity analysis