Answered: What is the cost-volume-profit analysis…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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What is the cost-volume-profit analysis and how can it be used for decisin making?

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Step 1: Cost-volume-profit (CVP) analysis

Cost-volume-profit (CVP) analysis is a financial management tool that helps businesses understand the relationship between costs, sales volume, and profit. It is a valuable tool for decision-making because it allows businesses to see how changes in these factors will affect their bottom line.

Key components of CVP analysis:

Costs: CVP analysis classifies costs into fixed costs and variable costs. Fixed costs remain constant regardless of the level of production or sales, while variable costs change with the level of production or sales.
Volume: Volume refers to the level of production, sales, or activity within a business. It is usually measured in units or dollars.
Profit: Profit is the difference between total revenue and total costs. CVP analysis focuses on the contribution margin, which is the difference between sales price per unit and variable cost per unit.

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