Cost Volume Profit Analysis Flashcards, test questions and answers
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What is Cost Volume Profit Analysis?
Cost Volume Profit Analysis (CVPA) is a method used by businesses to identify the level of production and sales where profits are maximized. It is based on the concept that costs, revenues, and volume can be manipulated in order to maximize profit for a given set of sales volume or output levels. The analysis involves determining how changes in cost, revenue, and volume affect profit. Cost Volume Profit Analysis helps firms predict future profits for different scenarios such as changing prices or increasing output. The main components that make up CVPA include cost structure, break-even point, operating leverage and margin of safety. Cost structure refers to fixed costs (costs which do not change regardless of changes in production/sales) and variable costs (costs which vary directly with increased production/sales). Break-even point calculates the amount at which total sales equal total costs (thereby resulting in no net income), while operating leverage measures how much impact a given change has on profit. Finally, margin of safety shows what percentage increase must be made to achieve desired profitability goals. When considering CVPA it’s important to remember that all inputs need to be accurate for results to be meaningful; this includes price elasticity data as well as realistic estimates regarding expected growth rates of demand over time. Also keep in mind that there are often external factors impacting business operations such as market fluctuations, competition etc., so these should also be factored into any decision making process based on CVPA analysis results. Overall Cost Volume Profit Analysis is an effective tool for understanding how different variables affect potential profitability within a business environment – allowing firms greater control when setting prices and analyzing expenses/profits associated with various levels of production/output volumes over time.