Cost Volume Profit Analysis:
A method for analyzing the link between COST, Volume, and Profit is called Cost Volume Profit analysis. The profit of an undertaking depends upon a large number of factors. But the most important of these factors is the COST of the manufacturer, the volume of sales, and the selling prices of the product. The CVP relationship is an important tool used for profit planning a business.
Cost volume profit analysis can be used to answer the following quarries –
- How many sales should be made in order to break even?
- How much should be the sales to earn desired profit?
- What will happen to profits if prices, costs, and volume change?
- Which product or product mix is most profitable?
- Which product should we manufacture or buy?