Cost-volume-profit analysis (CVP analysis) deals with how profit and costs change with a change in volume. By studying the relationships between these items, management has better control over its planning and decision-making functions.
CVP analysis, despite being very useful, is subject to several limitations. Certain assumptions must be kept in mind when using and applying CVP analysis concepts.
By analyzing the effect of change in volume to costs and profits, we can determine the break-even point, sales required to achieve a target income, margin of safety, and degree of operating leverage. These topics are discussed in detail in this chapter.