Question

Describe the application of cost volume profit analysis to a new restaurant concept as a memo

Answer 1

What Is Cost-Volume-Profit – CVP Analysis?

Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that varying levels of costs and volume have on operating profit. The cost-volume-profit analysis, also commonly known as break-even analysis, looks to determine the break-even point for different sales volumes and cost structures, which can be useful for managers making short-term economic decisions

The cost-volume-profit analysis makes several assumptions, including that the sales price, fixed costs, and variable cost per unit are constant. Running this analysis involves using several equations for price, cost and other variables, then plotting them out on an economic graph.

Cost-Volume-Profit analysis formula

= Fixed cost ÷ contribution

Contribution = Sales - Variable cost

The break-even point calculation allows food service operators to calculate the number of covers (or units sold) or total sales needed to cover all costs of the operation given the level of business generated. Once the break-even point is met, additional revenue (or sales) starts to generate a profit, which is typically at least one purpose of running a business. Cost volume profit analysis allows the food service operator to calculate similar figures but with a targeted profit in mind. This CVP analysis is an essential tool in guiding managerial, financial and investment decisions for current operations or future business ideas or plans.

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