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Cost-volume-profit (CVP) analysis is a cost accounting method that helps companies understand how changes in costs and volume affect their operating profit. It's also known as breakeven analysis.
CVP analysis helps companies determine: Breakeven point: How many units need to be sold to cover all costs Minimum profit margin: How many units need to be sold to reach a certain profit margin Economic justification: Whether it's worth manufacturing a product
CVP analysis focuses on sales volume because sales price, labor, and material costs are usually known with some accuracy. Sales volume, however, is not usually predictable. CVP analysis assumes a linear relationship between costs, volume, and profits, which may not always hold true in practice. It also assumes that all costs can be easily classified as either fixed or variable, which might not be the case for some businesses.
The key CVP formula is profit = revenue – costs.
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