Cost-Volume-Profit (CVP) Analysis
Cost-volume-profit analysis examines the relationships among costs, volume, and profit to determine how changes in each variable affect operating income.
Explanation
CVP analysis relies on separating costs into fixed and variable components. The contribution margin (revenue minus variable costs) is the amount available to cover fixed costs and generate profit. The contribution margin ratio expresses this as a percentage of sales. CVP assumptions include linear cost behavior, constant sales mix, and that all units produced are sold. This analysis underpins breakeven calculations, target profit analysis, and sensitivity analysis.
Key Points
- •Contribution margin = sales revenue − variable costs
- •Contribution margin ratio = contribution margin ÷ sales
- •Assumes linear relationships, constant sales mix, and production = sales
Exam Tip
For multi-product companies, calculate the weighted-average contribution margin per unit based on the sales mix to find the overall breakeven point.
Frequently Asked Questions
Related Topics
Breakeven Analysis
Breakeven analysis determines the sales volume at which total revenue equals total costs, resulting in zero profit or loss.
Relevant Costs and Decision-Making
Relevant costs are future costs that differ between decision alternatives; sunk costs and costs that do not change between options are irrelevant to the decision.
Test your knowledge
Practice scenario-based questions on this topic with detailed explanations.