CVP analysis

From Wikipedia, the free encyclopedia

There are very few or no other articles that link to this one.
Please help introduce links in articles on related topics. After links have been created, remove this message.
This article has been tagged since July 2006.

CVP stands for Cost-Volume-Profit. The CVP analysis helps understanding the financial impact of basic business decisions.

[edit] Main tools

The main tools used for a CVP analysis are

Break even analysis
Contribution margin analysis, which compares the profitability of production lines
Operating leverage, i.e. to which extent a business uses fixed costs in operations. With help of breakeven points the organization can examine the effects of increases or decreases in fixed costs.

CVP is a management accounting tool that express relationship between sales volume, cost and profit. CVP can be used in the form of graph or an equation.

Approaches to CVP analysis

Cost and revenue equations contribution margin profit graph

Objectives of CVP analysis

In order to forecast profits accurately, it is essential to assertain the relationship between profit and cost on one hand and volume on the other.

CVP analysis is helpful in producing a flexible budget

This will help in determining the pricing decisions that should be made for the product