Cost Volume Profit Relationship - (CVP Analysis):
After studying this chapter you should be
able to:
- Explain the objectives of cost volume profit
analysis (CVP Analysis)?
- Define and explain contribution margin
and contribution margin ratio.
- Define, explain and calculate breakeven
point?
- Explain operating leverage and operating
leverage ratio?
- Explain the assumptions of CVP
analysis?
- Explain the limitations of CVP
analysis?
- Explain advantages and disadvantages of
CVP Analysis?
Cost volume profit analysis (CVP analysis) is
one of the most powerful tools that
managers have at their command. It helps them understand the interrelationship
between cost, volume, and profit in an
organization by focusing on interactions
among the following five elements:
-
Prices of products
-
Volume or level of activity
-
Per unit variable cost
-
Total fixed cost
-
Mix of product sold
Because cost-volume-profit (CVP) analysis helps managers understand the
interrelationships among cost, volume, and profit it is a vital tool in many
business decisions. These decisions include, for example, what products to
manufacture or sell, what pricing policy to follow, what marketing strategy to
employ, and what type of productive facilities to acquire.
Applications of Cost Volume Profit (CVP) Concepts:
Now we can explain how CVP concepts
developed on above pages can be used in planning and decision making. We
shall use these concepts to show how changes in variable costs, fixed costs,
sales price, and sales volume effect contribution margin and profitability
of companies in a variety of situations. For detailed study click on a link
below.
Break Even Analysis:
Break even is the level of sales at which the
profit is zero. Cost volume profit analysis is some time referred to simply as
break even analysis. This is unfortunate because break even analysis is only one
element of cost volume profit analysis. Break even analysis is designed to
answer questions such as "How far sales could drop before the company begins
to lose money." For detailed study about break even click on a link
below:
Cost Volume Profit (CVP) Consideration in Choosing a Cost Structure
Operating Leverage and degree of operating leverage
Assumptions of Cost Volume Profit (CVP) Analysis
Limitations of Cost Volume Profit Analysis
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