Cost Volume Profit Analysis Basics
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Cost-volume-profit analysis, or CVP, is something companies use to figure out how changes in costs and volume affect their operating expenses and net income. In other words, CVP is a methodical analysis of the dynamic inter-relationship between selling prices, sales and production volume, cost expenses, and profits.
Explain each of the three elements of CVP analysis.
Discuss how managers use CVP analysis.
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Solution Summary
The elements of CVP analysis are outlined and how managers can use the information from such an analysis.
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As a manager, an element of your job, one of the most important tasks and generally underrated, is monitoring costs and pricing. And therefore, the importance of CVP analysis, since this analysis provides useful information for the decision-making process on the pricing, market and make/not make products to maximize the company revenue or minimize the company loss. On the other hand, CVP analysis helps to understand the relationship that exits between costs, volumes and profits.
But first, we need to be clear on what Cost volume profit analysis is and what is used for. CVP Analysis involves using cost behavior patterns to interpret and forecast the changes in operating income that result from changes in revenues, costs, or volume of activity (Marshall, et al. 2014). In a more resumed way and in simple words, CVP analysis analyzes how volume and cost changes impact on profit, cost, or the volume of activity. As an example, and one of the most important application of CVP analysis in managerial positions is to determine the break-even point (amount of revenue needed to have neither operating profit nor operating loss) for a company (or one of its units or products). Additionally, CVP analysis is also useful for managerial positions for planning and evaluating the results of actual operations, since this type of analysis underlines the cost behavior pattern and the impact on costs and profits of changes in the volume of activity. And this, in turn, decodes into a very useful decision-making tool for ...
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