What is a Profit Volume Chart?

Profit Volume Chart

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Profit Volume Chart

A profit volume (PV) chart is a graphical representation that shows the relationship between a firm’s profit and its sales volume. It is a helpful tool in managerial decision making, particularly when the firm needs to make decisions regarding its sales volume.

The PV chart plots profit on the vertical axis and sales volume on the horizontal axis. It includes a line showing the level of sales needed to achieve break-even (i.e., where total revenue equals total costs, resulting in zero profit). Beyond this break-even point, the firm starts making a profit.

The slope of the line in a PV chart is determined by the contribution margin ratio (i.e., the proportion of each sales dollar that contributes to covering fixed costs and then providing profit). As sales increase, profit increases at a rate equal to the contribution margin ratio.

The PV chart helps managers visualize how changes in sales volume affect profits, aiding in decisions such as pricing, budgeting, forecasting, and cost management. It’s particularly useful in scenarios like evaluating the financial impact of increasing production, entering a new market, or launching a new product.

It’s important to note that PV charts typically make several simplifying assumptions, such as fixed costs and variable cost per unit, and a constant selling price, which might not hold in more complex, real-world situations.

Example of a Profit Volume Chart

Imagine a company named “SofaCraft,” which manufactures and sells sofas. Each sofa is sold for $500, and the variable cost of producing each unit is $300. The company has fixed costs of $50,000, which include things like rent, salaries, and equipment depreciation.

First, we need to calculate the contribution per unit, which is the selling price per unit minus the variable cost per unit.

Contribution per unit = Selling Price per unit – Variable Cost per unit = $500 – $300 = $200

Next, we need to calculate the breakeven point in units, which is the fixed cost divided by the contribution per unit.

Breakeven point in units = Fixed Costs / Contribution per unit = $50,000 / $200 = 250 units

This means SofaCraft needs to sell 250 sofas to cover its fixed costs and breakeven.

Now, let’s plot this information on a Profit-Volume chart:

  • The horizontal axis represents the number of units sold (Sales volume).
  • The vertical axis represents the profit or loss.
  • Plot a horizontal line at the $0 profit level (this is the breakeven point).
  • Plot a line that starts at -$50,000 (the total fixed costs) when no units are sold, and passes through the breakeven point (250 units, $0 profit). This line will continue to rise, indicating increasing profits beyond the breakeven point.

The line’s slope represents the contribution margin per unit. As sales increase beyond the breakeven point, the line rises, indicating growing profits.

This chart provides a visual representation of how profit changes with sales volume. For instance, SofaCraft can see how much their profit will increase if they sell 300 sofas instead of 250, or how much they’ll lose if they only sell 200.

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