Cost-Volume-Profit (CVP) Analysis is also known as Break–Even Analysis. Every business organization works to maximize its profits. With the help of CVP analysis, the management studies the co-relation of profit and the level of production.
CVP analysis is concerned with the level of activity where total sales equals the total cost and it is called as the break-even point. In other words, we study the sales value, cost and profit at different levels of production. CVP analysis highlights the relationship between the cost, the sales value, and the profit.
Assumptions
Let us go through the assumptions for CVP analysis:
● Variable costs remain variable and fixed costs remain static at every level of production.
● Sales volume does not affect the selling price of the product. We can assume the selling price as constant.
● At all level of sales, the volume, material, and labor costs remain constant.
● Efficiency and productivity remains unchanged at all the levels of sales volume.
● The sales-mix at all level of sales remains constant in a multi-product situation.
● The relevant factor which affects the cost and revenue is volume only.
● The volume of sales is equal to the volume of production.
