Question

CVP analysis

The relationship between costs, volume and profit assumes a relevant range. How would a company know if the sales volume they are predicting is considered part of the relevant range?

Answer 1

CVP analysis :Cost-volume profit (CVP) analysis is based upon determining the breakeven point of cost and volume of goods and can be useful for managers making short-term economic decisions. Cost-volume profit analysis makes several assumptions in order to be relevant including that the sales price, fixed costs and variable cost per unit are constant. CVP analysis is a method of cost accounting that is concerned with the impact varying levels of sales and product costs will have on operating profit.

CVP analysis is only reliable if costs are fixed within a specified production level. All units produced are assumed to be sold and all costs must be variable or fixed in a CVP analysis. Another assumption is all changes in expenses occur because of changes in activity level. Semi-variable expenses must be split between expense classifications using the high-low method, scatter plot or statistical regression.