A sphere packing approach to break even and profitability analysis

Abstract

The relationship between a company's cost, volume, and profit is important for strategic planning and widely used in business analysis and industrial management. Traditional Cost-Volume-Profit (CVP) analysis is used when a company is trying to determine what single level of sales, prices, and costs is necessary to reach a specific amount of profit. So far, a little attention has been paid to the extension of existing models of CVP analysis to illustrate a set of break even points, profitable sales, prices, and costs. For this purpose, for the first time, we propose a new approach to break even and profitability analysis called sphere packing based on a notion of set of profitability conditions with respect to CVP parameters. This approach uses sphere packing theory [9,10], linear programming and allows industries to handle break even and profitability analysis for multi-product case finding a set of required sales, prices, and costs to ensure profitability of a company. The sphere packing approach also provides practical suggestions and recommendations for managers to choose a set of optimal CVP parameters. The proposed approach is illustrated on some examples providing numerical results.