COST-VOLUME PROFIT ANALYSIS

CVP analysis expands the use of information provided by break-even analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss. This break-even point can be an initial examination that precedes more detailed CVP analysis.

CVP analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:

• The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.)
• Costs can be classified accurately as either fixed or variable.
• Changes in activity are the only factors that affect costs.
• All units produced are sold (there is no ending finished goods inventory).
• When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.

The components of CVP analysis are:

• Level or volume of activity
• Unit selling prices
• Variable cost per unit
• Total fixed costs