WHAT IS CVP ANALYSIS?
The Cost -Volume-Profit (CVP) analysis is an attempt to measure the effect of changes in volume, cost, price and products-mix on profits. You will appreciate that while these variables are inter-related, each one of them, in turn, is affected by a number of internal and external factors. For instance, costs vary due to choice of plant, scale of operations, technology, efficiency of work-force and management efficiency. Etc
Also, cost of inputs bought externally is affected by market forces. While many wideranging factors influence costs and profits, the largest single variable affecting them in the short-run is the volume of output. Hence, the CVP relationship acquires a vital significance for the manager facing a wide spectrum of short-run decisions like: what are the most profitable and what are the least profitable products? How does a reduction in selling prices affect profits? How does volume or product-mix affect product costs and profits? What will be the break-even point if volume and costs change? How an increase in wages and /or other operating expenses will affect profit? What will be the effect of plant expansion on costs, profit and volume of sales? Answers to all such questions will have to be formulated in a cost-benefit framework and CVP analysis will offer the technique for doing it.
CVP analysis explores the fundamental relationships between cost -volumeprofiit variables. You will observe that changes in volume influence cost and profit and, while this process gets underway, a stage is reached when cost is equated with revenue at acertain level of output or at a certain volume of sales. This is recognised as `break-even point.' You must understand that ‘break-even point’,
Please visit my podcast and you tube channels for more on healthcare topics audio and video session:
Podcast : https://overcast.fm/itunes1507693104/management-session-by-amrita-jha
Youtube : psb training academy/ amrita jha
Face book - mbaamrita
website : www.psbtrainingacademy.com
Comments
Post a Comment