Cost-Volume-Profit Analysis (CVP)
A management tool examining how changes in costs, sales volume, and prices affect profits, helping forecast break-even points and target income levels.
Cost-Volume-Profit Analysis (CVP)
A managerial accounting technique that examines the relationships between costs, volume, and profits to help managers understand how changes in one factor affect the others and the overall financial results.
For example, a manufacturer using CVP analysis might determine that with fixed costs of $200,000, a contribution margin per unit of $40, and a desired profit of $300,000, the company needs to sell 12,500 units to reach its profit target.
CVP analysis helps managers calculate break-even points, plan for target profit levels, evaluate the impact of price changes, and assess the risk associated with different cost structures. It relies on assumptions including linear cost behavior, constant sales mix, and all costs classifiable as fixed or variable, which may limit its precision in complex or highly variable business environments.