Assignment:
Cost-Volume-Profit (CVP) analysis is a computational method that analyzes the effect of sales and product costs on the operating income of a business. Specifically, it assesses the effect of changes in variable costs, fixed costs and selling price on operating income. Break-even analysis (with or without a target profit) is a common CVP approach. Another definition of break-even is where the total contribution margin equals total costs. A contribution margin income statement shows zero income at break-even.
Several assumptions underlie CVP analysis:
All cost can be categorized as variable or fixed.
Sales price per unit, variable cost per unit, and total fixed cost are constant.
Mixed costs must be split into their fixed and variable component by an estimation process.
Understanding the behavior of costs makes cost-volume-profit analysis possible.
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