Cost-volume-profit (CVP) analysis

Definition

Cost-Volume-Profit (CVP) analysis is a managerial accounting tool used to determine how changes in costs and volume affect a company's operating income and net income. It helps managers make decisions about pricing, production levels, and product mix by analyzing the relationships among cost, volume, and profit.

5 Must Know Facts For Your Next Test

1. The break-even point is where total revenues equal total costs, resulting in zero profit.
2. Contribution margin is calculated as sales revenue minus variable costs.
3. Fixed costs remain constant regardless of production levels within the relevant range.
4. The CVP analysis assumes linear behavior for both total revenues and total costs over the relevant range.
5. Operating leverage measures how sensitive net operating income is to a given percentage change in sales.

Review Questions

• What is the formula to calculate the break-even point in units?
• How does an increase in fixed costs affect the break-even point?
• What assumptions does CVP analysis make about cost behavior?

Related terms

Break-Even Point: The level of sales at which total revenues equal total costs, resulting in zero profit.

Contribution Margin: The amount remaining from sales revenue after variable expenses have been deducted.

Operating Leverage: A measure of how sensitive net operating income is to a given percentage change in sales volume.