Cost volume profit (CVP) analysis is a technique used to determine the effects of changes in an organization’s sales volume on its costs, revenue and profit. CVP can also be used to analyze the effects on profit of changes in selling prices, costs, income tax rates and the organization’s mix of products or services.
To make profits is the first law of any business enterprise. If we eliminate the profit, the enterprise is also liable to be eliminated. Yet, very few managers know about the profit structure in their own company or the basic elements that determine the profit structure. Cost-Volume-Profit (CVP) analysis is an important tool that analyses the interplay of various factors that affect profits. CVP analysis shows the relationships among a business’s costs, volume and profits. It is an important part of the budgeting activities of an organization.
Cost-Volume-Profit (CVP) analysis is a tool used extensively in both the planning and control functions of an organization. An organization may use CVP analysis as a planning tool when the management wants to find out the desired profit, when the sales volume is known. Alternatively, the management may begin with a target profit and then work out the level of sales needed to reach that profit level. As a control technique, CVP analysis is used to measure the performance of the different departments in a company. A basic application of CVP analysis is the break-even analysis. The break-even analysis tries to determine the sales volume at which total revenue equals total costs so that profits are seen.