2023 Background info Cost Volume Profit CVP analysis is a computational method that analyzes the effect of | Assignments Online
2023 Background info Cost Volume Profit CVP analysis is a computational method that analyzes the effect of | Assignments Online
Assignments Online 2023 Business Finance
Background info
Cost-Volume-Profit (CVP) analysis is a computational method that analyzes the effect of sales and product costs on the operating income of a business. Specifically, it assesses the effect of changes in variable costs, fixed costs and selling price on operating income. Break-even analysis (with or without a target profit) is a common CVP approach. Another definition of break-even is where the total contribution margin equals total costs. A contribution margin income statement shows zero income at break-even.
Several assumptions underlie CVP analysis:
- All cost can be categorized as variable or fixed.
- Sales price per unit, variable cost per unit, and total fixed cost are constant.
- Mixed costs must be split into their fixed and variable component by an estimation process.
- Understanding the behavior of costs makes cost-volume-profit analysis possible.
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