Cost-volume-profit (CVP) analysis

Welcome to our session on cost volume profit or CVP analysis. Also known as break even analysis, CVP analysis is an essential management accounting tool. Its main purpose is to help decision makers understand how changes in costs and volume affect a company's profit. By exploring the relationship between sales, costs, and profit, managers make better informed decisions about pricing, product mix, and resource allocation. While terminology varies between the United Kingdom and the United States of America, the principles remain the same. To apply CVP analysis effectively, several assumptions are made. The sales price per unit remains constant, and each cost is classified as either fixed or variable. Variable costs shift directly with production volume like raw materials, while fixed costs, such as rent or salaries, remain unchanged over relevant production levels. It is assumed there are no inventory changes, so units produced equal units sold. Although these assumptions may not fit every real world scenario, CVP remains a reliable tool for short run decision making. The core output of CVP analysis is the break even point where total revenues equal total costs and profit is zero. This can be found using methods such as the equation approach, which sets sales minus total cost to zero, the contribution margin approach, dividing fixed costs by contribution margin per unit, or the contribution margin ratio approach, calculating break even in dollars.