Cost Volume Profit analysis is a short term decision making tool used to assist managers in understanding the behavior of total costs, total revenues and operating income as changes occur in the output level, selling prices, variable cost or fixed costs.
Cost Volume Profit analysis is able to show the impact on the organization profit given different set of sensitivity in selling prices, costs, income tax rates, product mix and others.
Normally Cost Volume Profit analysis involve the Break-even Calculation.
It is important to understand the CVP analysis are based on the following key assumptions:
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1. Fixed costs are constant over the output range |
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2. It is possible to divide costs into fixed and variable elements |
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3. Variable costs are directly proportional to volume |
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4. All other variables remain constant. |
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5. Profits are calculated on marginal-costing basis. |
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6. All units produced are sold. |