CPV analysis is a powerful tool that helps managers understands the relationships of cost volume and profit. Cost volume profit (CVP) analysis is the relationship among cost, volume, and profit when output increases units cost of production decrease vice versa. It 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.
An analysis of the relationship among sales, volumes, costs and net profit or loss is called Break-even analysis.
Assumptions of CVP analysis:
- Selling price is constant. The price of a product or service will not change as volume Changes.
- Costs are linear and can be accurately divided into variable and fixed elements.
- In multi-product companies, the sales mix is constant.
- In manufacturing companies, inventories do not change. The number of units produced equals the number of units sold.
- All cost can be categorized as variable or fixed.
- Sales price per unit, variable cost per unit and total fixed cost are constant.
- All units produced are sold.
