Cost-Volume-Profit In Practice

The break-even point and break-even analysis are defined and illustrated by this video about Southwest Airlines. A manager describes how break-even analysis helped a company decide to go ahead with a low gross margin product line that did not look profitable at first glance. The use of graphs in CVP analysis and the benefits of such presentations highlighted. After various cost structures are described, the degree of operating leverage is defined, and the uses of this information are overviewed. The video segment concludes with a summary of the CVP analysis tool.

Answer the following:

• What is meant by a product’s contribution margin ratio? How is this ratio useful in planning?
• What is meant by the term break-even point?
• What is meant by the term operating leverage? How is the degree of operating leverage calculated?
• What are the assumptions that underlie CVP analysis