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.
Understanding Profit-Volume (PV) Chart
With profits/(losses) on the Y-axis and volume (quantity or units) on the X-axis, 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. Where the total sales line intersects with the total cost line is the approximate breakeven point of a product in terms of volume. Volumes to the right of this 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; for each room, they have purchased furniture, bedding, window treatments, air conditioning units, lighting, televisions and so on. 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, employing front desk staff, etc., 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.