How do you reveal the cost structure of an organization?

In this section, I will apply estimation techniques to both revenues and costs to estimate the parameters of a profit equation1, build a CVP graph, and finally build a contribution income statement. These three alternative representations of cost structures and profit behaviors are the foundations upon which we will later build our understanding of operating risks.

  1. In this chapter, I use the terms profit and Operating Income interchangeably to refer to the same aggregate: the Earnings Before Interests and Taxes (EBIT).↩︎