What Is a Profit-Volume (PV) Chart?
A profit-volume (PV) chart is a graphic that shows the earnings (or losses) of a company in relation to its volume of sales. Companies can use profit-volume (PV) charts to establish sales goals, analyze whether new products are likely to be profitable, or estimate breakeven points.
- A profit-volume (PV) chart is a graphic that shows the earnings (or losses) of a company in relation to its volume of sales.
- The profit-volume chart gives a company a visual of how much product must be sold to achieve profitability.
- Companies can use profit-volume charts to establish sales goals, analyze whether new products will be profitable, or estimate breakeven points.
Understanding Profit-Volume (PV) Chart
The profit-volume chart gives a company a visual of how much product must be sold to achieve profitability. The total costs of a company include variable and fixed costs. Fixed costs represent the money spent on assets needed to produce the product, which can include the cost of the building and equipment. Variable costs represent the costs that fluctuate with sales volumes, such as raw materials and inventory. If a company produces zero sales, they would still have the expense of their fixed costs but would have no variable costs, assuming they didn't buy any inventory.
A company must generate enough sales to cover both their variable costs and fixed costs. When pricing the product for sale, management would need to cover the variable costs to produce each unit, but also some portion of the fixed costs. Over time and with enough sales volume, the company would reach its breakeven point, which is when they've generated enough sales volume so that the cumulative total of the profit-per-unit covers all of the fixed costs.
For example, let's say a company has $1,000 in fixed costs, and they earn $50 per unit in profit, which covers the variable costs for each unit. The company would need to sell 20 units to achieve breakeven (20 * $50 = $1,000).
Plotting the Profit-Volume (PV) Chart
When plotting the profit-volume chart, where the total sales line intersects with the total cost line is the approximate breakeven point of a product in terms of volume.
Profits or (losses) are plotted on the Y-axis (the vertical axis) while sales volume (quantity or units) is plotted on the X-axis (the horizontal axis). Initially, the line will begin to the left and below zero at the amount of the fixed costs. In other words, if a company has $20,000 in fixed costs, the line will begin at -$20,000, and as each sale is made, the line would slope upwards until it reaches zero or breakeven.
As the volume of sales increases, the line rises from left to right in an upward sloping manner so that profits rise as sales increase. Sales volumes to the right of the breakeven point on the chart indicate profits, while volumes to the left result in losses.
The slope of the total sales line is important; the steeper the slope, the less volume required to earn a profit. The steepness of the slope is a function of the price of the product. Aside from pricing strategy, management can impact how a PV chart appears by manipulating a variable and fixed cost components. Obviously, any successful efforts to lower costs will shift the breakeven volume point to the left.
Example of a Profit-Volume (PV) Chart
A company with significant fixed costs depends heavily on sales volume to achieve its profit goals. Hotels, for example, have a fixed number of rooms and for the rooms, the hotel purchased furniture, bedding, window treatments, air conditioning units, lighting, and televisions. The hotel also has to maintain its common areas regardless of the number of visitors it has on a given night.
Thus, in order to cover the costs of running the hotel restaurant, keeping the hotel pool clean, heating or cooling the hotel lobby and hallways, and employing front desk staff, the hotel must sell a certain number of room nights before it starts to earn a profit on a given night. The PV chart can approximate that breakeven point and help guide hotel management meet and exceed that number.
As an example, let's say the hotel spent $20,000 on fixed costs for materials. Below is the per-room rental fee, the variable costs-per room, and the resulting profit-per room.
- $350 per-night rental rate
- $75 variable costs per-room
- $275 profit per-room
However, the $275 profit per-room doesn't account for the fixed costs. As a result, it would take 73 room rentals before the hotel paid for its fixed costs ($20,000 / $275).