What is Cost-Volume-Profit analysis?
Cost-Volume-Profit (CVP) analyses help managers understand how the decisions they make related to volumes, product mix, prices, unit variable costs, and fixed costs affect operating income and operating risks. In Chapter 7 I will go deeper into the impact on operating income. In this chapter I will therefore focus more on operating risks. At the end of this chapter, you should be able to:
- explain the purposes of CVP analysis and describe its process;
- build a profit function and a contribution income statement;
- read CVP and profit graphs;
- compute a break-even point or a target profit point for both a single product and multiple products;
- compute and interpret the margin of safety and the operating leverage;
- Identify the assumptions of CVP analyses and explain how relaxing these assumptions affect operating income volatility.