Determine the number of units that must be sold to break even or earn a target profit. Costvolumeprofit analysis cvp analysis is based on the relationship between volume and sales revenue, costs and profit in the short run one year or less. Costvolumeprofit analysis and decision making in the. Costvolumeprofit cvp analysis is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices. Analyzing costvolumeprofit relationships 1 understand the key factors involved in costvolumeprofit cvp analysis and why it is such an important tool in management decision making. Cvp analysis is the analysis of three variable viz. Managers use the contribution margin to plan for the business. Pdf abstract a good understanding of cost and revenue behavior is critical.
Costvolumeprofit cvp analysis is used to determine how changes in costs and. A graphical format of presenting information on the cvp analysis gives. The relationship between profit and the cm ratio can be expressed using the following equation. The cost volume profit relationship can be seen by the graph below. It can also be expressed as the ratio of the contribution margin per unit to the selling price per unit. If you dont sell anything, then you dont generate any revenue. Costvolumeprofit cvp analysis is one of the major tools of financial analysis. This income statement format is known as the contribution margin income.
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