Cost – volume – profit Analysis

Cost – volume – profit Analysis

Cost – volume – profit (CVP) analysis is an analytical tool for studying the relationship between volume cost, price and profits. It is an integral part of the profit planning process of the firm. However, formal profit planning and control involves the use of budgets and other forecasts, and the CVP analysis provides only an overview of the profit planning process. Besides, it helps to evaluate the purpose and reasonableness of such budgets and forecasts. Generally, CVP analysis provides answers to questions such as:

(a)  What will be the effect of changes in prices / costs and volume on profit?

(b)  What minimum sales volume need be effected to avoid losses?

(c)  What should be the level of activity to earn a target profit?

(d)  Which product is the most profitable and which product or operation of a plant should be discontinued? Etc