CVP analysis

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CVP stands for Cost-Volume-Profit. The CVP analysis is a financial decision making aid used to determine the level of output used to achieve any target profit level or the financial impact of basic business activities like changes in costs or pricing.

[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.

CVP Analysis can be used in marketing to determine the point of maximum profit for a company engaged in Internet Marketing efforts, in relation to the cost of those efforts and the volume of sales created. It is a key measurement in determining marketing strategy and developing realistic business goals (increased profit volume or market share.)

CVP Analysis is a multi-variable equation that takes into account various middle metrics, including Return on Investment (ROI) and Customer Acquisition Cost (CAC). Some marketers, particularly in online marketing firms, use CVP Analysis to predict where maximum profit volume exists for their clients, and manipulate the middle metrics to in order to make the path to success more efficient.

Using CVP Analysis, marketing firms can measure the results of media campaigns along the Customer engagement cycle and convert the data into sound business strategy. Through predictive analysis, they are able to gauge the effects of future marketing mix changes to produce maximum profit volume or increased market share for their clients.

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 ascertain the relationship between profit and cost on one hand and volume on the other.

CVP analysis is helpful in producing a flexible budget

In marketing, CVP analysis can be used to create flexibility within media budgets and allocation. Using CVP analysis to predict profit volume allows marketers to make subtle shifts in middle metrics, testing strategies to produce optimal results.

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