A cost-volume-profit (CVP) analysis is a systematic method of examining the effects of changes in an organizations volume of activity on its costs, revenue

and profit.

ASSUMPTIONS OF CVP ANALYSIS

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The analysis is valid for limited range of values and for a limited period of time.

Cost can be classified as fixed and variable cost. The variable cost changes O proportionately with the volume for the limited range of values .
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Revenues change proportionately with volume. There exist a constant product mix. The units produced are assumed to be sold. Changes in volume alone are responsible for changes in cost and revenue

LIMITATIONS OF CVP ANALYSIS

It is presumed that anticipated capacity of production remains same. But it may be increased depending upon the need. The CVP ANALYSIS gives satisfactory results only if elements of cost remains stable but in practice it varies. The CVP ANALYSIS does not hold good when manual labour is replaced by machines or high cost of materials are replaced by low cost materials.