Cost-Volume-Profit (CVP) Analysis is a financial tool used by businesses to understand the relationship between costs, sales volume, and profits. It helps in decision-making by analyzing how changes in costs and sales levels affect profitability.
Key Components of CVP Analysis
- Costs that do not change with the level of production or sales, such as rent, salaries, or insurance.
- Costs that change directly with the level of production or sales, like raw materials or sales commissions.
Sales Price per Unit:
- The amount charged to customers for each unit of product or service sold.
Contribution Margin:
- The difference between the sales price per unit and the variable cost per unit.
Applications of CVP Analysis
Pricing Decisions:
- Helps determine the impact of price changes on profitability.
Profit Planning:
- Assists in setting sales targets to achieve desired profits.
Cost Control:
- Identifies how changes in fixed and variable costs affect profitability.
Evaluating New Investments:
- Analyzes the financial feasibility of new projects or product lines.
Break-Even Analysis:
- Determines the minimum sales volume needed to avoid losses.
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