This work tries to dimension the volume of activity so that it can emphasis the break even point and the predicted volume for the desired profit. The relationship between volume-cost-profit, known as economies of scale, is explained by the unit profit growth as the volume of production raises, as a consequence of the decrease of the unit cost by reducing the fixed unit costs and keeping the variable unit costs as they are. There are analyzed the effect in trying to eliminate the competition and in practicing a political monopoly by the top companies and the measures of political economy undertook to erase the unfair competition and dumping.cost, profit, volume of activity, economies of scale

Nicolae SICHIGEA

Tudor CIUREZU

English

Research Papers in Economics

66                                                                         Finance – Challenges of the Future   
THE ANALYSIS OF COST-PROFIT-VOLUME IN MAKING 
A DECISION ABOUT THE VOLUME OF ACTIVITY OF A 
COMPANY 
 
Prof. Nicolae SICHIGEA, PhD 
Assoc. Prof. Tudor CIUREZU, PhD 
University of Craiova 
 
Company value maximization, 
the main objective of the financial 
function, materialized in the growth of the 
net assets (Total assets- debts) and in 
the appreciation of the company’s 
capacity to make profit. As the efficiency 
of the financial management is based on 
the financial results and the obtained 
profit, a high importance for the 
company’s activity is the establishment of 
the minimum limit for the volume of 
activity, of whose unfulfilment would draw 
loss. Because in a market economy the 
producer can’t influence neither the 
prices of the factors of production, nor 
the prices of the goods and services he 
sells, but the only element where he can 
act is the volume of activity until a settled 
level, known as break even point, where 
the company is facing with loss. Beyond 
the point when the sum of incomes is 
equal to the sum of expenditures, the 
company gets profit. Schematically, the 
steps taken in adopting the management 
decision can be summarized like this: 
 
Management decision 
The analysis of gross margin 
Break even point and CBV 
Reliable information: 
Fixed costs, variable costs 
The method of extremes 
Regression analysis  Visual techniques 
  
 
  Gross gain = Operating income 
– variable expenditures 
  CBV= cost- benefit- volume 
The size of the profit depends on 
the structure of operating expense and 
the level of fixed expenditures that the 
company has to cover. There is a 
relationship between costs, volume of 
activity and profit that managers must 
know to fix their objectives of sales. 
Knowing the structure of costs is 
very important in determining the break 
even point: fixed costs (of structure) and 
variable costs( operational). 
Fixed costs are independent of 
the volume of production or sales. But 
these are not invariably, the modification Year VIII, No.9/2009                                                                                                     67 
 
of the activity leads to the modification of 
the fixed costs that will be the same for a 
long period of activity, developing a 
constant evolution on levels. That is why 
the fixed costs don’t react on the volume, 
but generally depend on time. That is 
why they are called costs of period, as 
they are related to time. This is the case 
of rent spending, insurance premium, 
and subscriptions laid in monthly or 
annual fixed amounts. Fixed costs are 
being registered even when the volume 
of activity is zero: rent and other 
periodical expenditures must be paid 
even if the company is not selling 
anything. Some fixed costs can not 
depend on time, their amounts is settled 
discretionary by the leadership. It is 
about the publicity expenditures whose 
amount is established by the managers, 
but in adopting the decisions, they must 
take in consideration many factors, as 
the competition level, innovation, 
producer’s prestige, etc. 
Fixed costs include: 
 the deprecation of fixed assets; 
 the rent for hired fixed assets; 
 expenses related to administration 
staff; 
 insurance premium; 
 other local taxes and duties(tax on 
buildings, land tax, tax for cars and 
vehicles); 
 storage costs. 
Variable costs are expenditures 
that vary directly proportional with the 
volume of production, but the extensive 
growth of the volume of production( using 
the staff after program  or in free days is 
being paid with additional charges)  or by 
intensifying the use of equipment( the 
costs with fuel and energy raise)  can 
result as emphasized growth of this type 
of expenditures. Also, as an example, in 
the case of products that use agricultural 
raw materials, the prices can raise more 
after a low harvest influenced by an 
unfavorable meteorological situation, or 
the passing, by ecological meanings, 
recyclable packaging, whose price is 
different.  
Variable costs include: 
 raw material consumption; 
  consumption of direct manual 
labour ( direct salaries); 
 sales commission. 
The break even point is 
calculated on a spreadsheet, using fixed 
costs, variable costs, total costs, total 
incomes and profit or loss for the growth 
of the physical volume of production, 
using graphics or graphic formulas 
starting with the fact that, in this point, the 
total expenditures (CT) are equal to the 
total incomes (VT). 
Marked with: 
 
   -  = critical production or break even 
point 
o Q
   - P = unit price ( VT=  *p)  o Q
   - CF = fixed expenditures 
   - Cv = fixed unit expenditures 
      - CV = fixed total expenditures( CV= 
*cv)  o Q
   - CT = CF+CV 
 
So: 
o Q *p = CF+ *cv   or  o Q
o Q *p-  *cv-CF=0  o Q
o Q (p-cv) – CF=0 
cv p
CF
Qo 
  
When: 
p-cv = gross unit margin 
 
The graphic representation of 
break even point: 
 68                                                                         Finance – Challenges of the Future   
Incomes 
Costs  VT 
break even point
CT 
CV 
CF 
   
 
This way of determinating the 
break even point is made according to 
the volume of production, incase of linear 
evolution of the prices and variable costs. 
The analysis of the breaking 
point is useful and highly used, but like 
any other technique, it can give wrong 
results if it is not used correctly. The 
quality of the results depends on the 
used information’s reliability and on the 
accuracy of information concerning the 
prices for sales, fixed and variable costs. 
If the desired information is the 
volume of activity(Q), which should bring 
an established volume of profit(P), then: 
cv p
P CF
Q


  
 
If the total fixed costs do not 
react to the variation of the volume of 
production, the fixed unit costs (per 
product) will drop as the volume of 
product on which will be distributed 
raises. On the contrary, the total variable 
costs rise once the volume of production 
will grow, but the variable unit costs are 
independent, so they maintain constant. 
As a consequence of the different 
evolution of these two components, the 
total unit cost drops once the volume of 
production grows, because when the 
total unit costs decrease progressively, 
the variable unit costs are constant. 
This relationship between 
volume-cost is known as economies of 
scale. When the unit costs drop and the 
unit price is kept constant, the profit per 
unit of product is growing progressively, 
proportional with the volume of 
production. So, the economy of scale is 
explained by a unit profit that rises 
gradually, as the volume of production 
grows. This economy of scale is also 
knows, economically speaking, as the 
cost of leverage. 
This effect of leverage can 
have an important consequence 
depending on the size of the company in 
some business sectors. If the economies 
of scale are important, then, as a 
company is bigger and produce more, as 
the unit profit will be higher. The biggest 
companies will be the ones who produce 
at the lowest cost on the market from the 
pointed sector of activity, determinating 
the competition’s bankruptcy by reducing 
the unit prices for sales. 
This problem has two aspects. 
First, it is created a natural selection, 
meaning that the strongest will survive 
and the clients will pay the lowest price 
on market. On the other hand, the 
company which has eliminated the 
competition would be in a monopoly 
Production  Production  1  2  3  n  o QYear VIII, No.9/2009                                                                                                     69 
 
situation and would have the chance to 
raise the prices as a consequence of the 
absence of competition. In this situation, 
which are the real losers: the bankrupt 
companies or the clients of that sector of 
activity? 
There are analyzed different 
ways of economic politics, in which the 
national and international legislation of 
the competition are called to bring in 
some answers. 
On the national plan, if the 
elimination of the competition is a result 
of competitiveness, producing equality 
and with low costs, in the future there 
must be followed that the left ones should 
not acquire abnormally profits in relation 
to the normal breaking even point. But 
the elimination of the internal competition 
can be realized by an aggressive 
strategy of prices reduction making the 
competition to act in the same way. The 
loss accumulated by the competitive 
sales must be proved. In this case, the 
arbitral tribunals from USA verify the 
notification of unfaithful competition if the 
sales prices used by the aggressor are 
inferior to the variable costs. There is 
known that the gross margin and variable 
expenses margin, a difference between 
turnover (the prices of sales) and total 
variable expenditures must cover a fixed 
expenditures and allow the gaining of 
profit. If the price is inferior to the variable 
costs, the margin is negative, the 
company couldn’t cover the fixed costs 
and also being in loss. The purpose is 
eliminating the unfaithful competition. 
The sales in loss must be used 
repetitively as a commercial strategy. It is 
used frequently for the balances 
liquidation of seasonal products, when 
low prices are used, sometimes with 50% 
or 75% to attract clients. 
Most frequently, the aggressor 
is a foreign company. When the inferior 
unit prices are used by a foreign 
company, to approve dumping, there 
must be checked if the prices on the 
foreign market are lower than those on 
the national market. The remedy is using 
some high enough duties to align the 
prices on the national market and on the 
foreign market too. 
 
 
 
 
REFERENCES 
Boardman A.E. 
Greenberg D.H. 
Viniong A.R. 
Weimer D.L. 
Analiza cost-beneficiu, concepte şi practică, ediţia a doua, Ed. ARC, 
Bucureşti, 2004; 
Livingstone J.L.  MBA finances, Ed. Maxima, Boulogne, 1993. 
 

The analysis of cost-profit-volume in making a decision about the volume of activity of a company

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