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Every organisation has a prime motive of not only earning profit but also maximizing it. A profit does not happen by chance. It has to be managed. Cost-volume-profit analysis (CVP Analysis) is a tool of planning for profit. is it correct. please explain it..
CVP analysis is the technique that examines changes in profit in response to the changes in sales volume,costs and prices.Accountants often perform CVP analysis to plan future levels of operating activity and provide information about
● Which products or services to emphasize
* whether to increase fixed costs
*Whether fixed costs expose organiztion to unacceptable levels of risk
* The amount of revenue required to avoid losses
* The volume of sales needed to achieve a targeted level of profit.
* How much to budget for discretionary expenditures.
Cost-volume profit analysis makes several assumptions in order to be relevant. It often assumes that the sales price, fixed costs and variable cost per unit are constant. Running this analysis involves using several equations using price, cost and other variables and plotting them out on an economic graph.
CVP Analysis deals with how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more different products.
CVP analysis has following assumptions:
CVP analysis also makes use of following concepts:
Contribution Margin (CM) is equal to the difference between total sales (S) and total variable cost or, in other words, it is the amount by which sales exceed total variable costs (VC). In order to make profit the contribution margin of a business must exceed its total fixed costs. In short:
CM = S − VCContribution Margin can also be calculated per unit which is called Unit Contribution Margin. It is the excess of sales price per unit (p) over variable cost per unit (v). Thus:
Unit CM = p − vContribution Margin Ratio is calculated by dividing contribution margin by total sales or unit CM by price per unit.
Cost-volume profit analysis is based upon determining the breakeven point of cost and volume of goods. It can be useful for managers making short-term economic decisions, and also for general educational purposes.
Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including:
Sales price per unit is constant.
Variable costs per unit are constant.
Total fixed costs are constant.
Everything produced is sold.
Costs are only affected because activity changes.
If a company sells more than one product, they are sold in the same mix.
Well explained by all ..........
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