# Cost Volume Profit Relationship – (CVP Analysis)

# Cost Volume Profit Relationship – (CVP Analysis):

**After studying this chapter you should be able to:**

- Explain the objectives of cost volume profit analysis (CVP Analysis & concept)?
- Define and explain contribution margin and contribution margin ratio.
- Define, explain and calculate breakeven point?
- Explain operating leverage and operating leverage ratio?
- Explain the assumptions of CVP analysis?
- Explain the limitations of CVP analysis?
- Explain advantages and disadvantages of CVP Analysis?

**Cost volume profit analysis (CVP analysis ) **is one of the most powerful tools that managers have at their command. It helps them understand the interrelationship between cost, volume, and profit in an organization by focusing on interactions among the following five elements:

- Prices of products
- Volume or level of activity
- Per unit variable cost
- Total fixed cost
- Mix of product sold

Because cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit it is a vital tool in many business decisions. These decisions include, for example, what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire.

- Contribution Margin and Basics of CVP Analysis
- Difference Between Gross Margin and Contribution Margin
- Cost Volume Profit (CVP) Relationship in Graphic Form
- Contribution Margin Ratio (CM Ratio)
- Importance of Contribution Margin

## Applications of Cost Volume Profit (CVP) Concepts:

Now we can explain how CVP concepts developed on above pages can be used in planning and decision making. We shall use these concepts to show how changes in variable costs, fixed costs, sales price, and sales volume effect contribution margin and profitability of companies in a variety of situations. For detailed study click on a link below.

- Change in fixed cost and sales volume
- Change in variable cost and sales volume
- Change in fixed cost, sales price and sales volume
- Change in variable cost, fixed cost, and sales volume
- Change in regular sales price

## Break Even Analysis:

Break even is the level of sales at which the profit is zero. Cost volume profit analysis is some time referred to simply as break even analysis. This is unfortunate because break even analysis is only one element of cost volume profit analysis. Break even analysis is designed to answer questions such as *“How far sales could drop before the company begins to lose money.”*** **For detailed study about break even click on a link below:

- Break even point analysis (calculation by contribution margin and equation method)
- Target profit analysis
- Margin of safety
- Sales Mix and Break Even with Multiple Products

** Cost Volume Profit (CVP) Consideration in Choosing a Cost Structure**

** Operating Leverage and degree of operating leverage**

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