Question

Explain the basic components of cost-volume-profit (CVP) analysis. Why is it important to determine a company's break-even point?

Answer 1

Cost Volume Profit analysis: -

It is used to determine the volume effect for a company's operating income and net income and changes in costs. Cost Volume Profit analysis is also known as Break-even analysis. Some of the assumptions that are analyzed by the CVP analysis are variable cost sale price and fixed costs remain constant.

Components of CVP analysis are:-

• The active level is the total number of units sold in the measurement period.
• Price per unit is the average price sold per unit that includes sale discounts which may reduce the gross price. In the mix of products and services Price per Unit changes from period to period
• Variable cost per unit is the total variable cost per unit in which the direct materials and sales commission is associated with a unit sale.
• Total fixed cost leads to be relatively steady from period to period. expect if there is a step cost that has to be elected as a completely new cost to change in activity level.