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Meaning Of Cost-Volume-Profit Analysis(CVP Analysis) Every firm has a prime motive of not only earning profit but also

maximizing it. A profit does not happen by chance. It has to be managed. Cost-volume-profit analysis (CVPAnalysis) is a tool of planning for profit. CVPanalysis is helpful for developing alternative strategies in sales planning and cost estimation. Certain relationship exists among the variables like selling price, sales volume and taxes. Cost-volu-profit analysis (CVPanalysis) is an accounting technique showing the relationship among these variables. CVP analysis, though most often illustrates business cases, is equally applicable for not profit making organizations to allocate scarce economic resources most effectively among the competing alternatives. Allocation of scarce resources among the various demanding sectors is the most important issue of national planning. CVP analysis is the analysis of the relationship between cost and volume of activities and the effect of the relationship on profit. Managers can use the concept of cost-volume-profit analysis to forecast volume of activity at which the firm will break-even or attain target profits. CVP analysis is therefore, a useful tool that helps managers, business owners and entrepreneurs to determine the profit potential of a new firm or the impact on profit due to changes in selling price, cost or level of activities of current business.

Definition of 'Cost-Volume Profit Analysis'


A method of cost accounting used in managerial economics. Cost-volume profit analysis is based upon determining the breakeven point of cost and volume of goods. It can be useful for managers making short-term economic decisions, and also for general educational purposes.

Investopedia explains 'Cost-Volume Profit Analysis'


Cost-volume profit analysis makes several assumptions in order to be relevant. It often assumes that the sales price, fixed costs and variable cost per unit are constant. Running this analysis involves using several equations using price, cost and other variables and plotting them out on an economic graph.
The relationship between cost volume and profit is shown by cost-volume-profit analysis. it is an analytical tool for analyzing the relationship among cost, price, profit, sales and production volume. Mainly there are three element in cost-volume-profit analysis. It is highly essential for the management to have the complete knowledge about the inter relationship among the cost, volume and profit. for this purpose cost-volume-profit analysis can be regarded as a sophisticated method or analytical tool used in management.