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Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analyses.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:
- The behavior of both costs and revenues in linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.)
- Costs can be classified accurately as either fixed or variable.
- Changes in activity are the only factors that affect costs.
- All units produced are sold (there is no ending finished goods inventory).
- When a company sells more than one type of product...
This section contains 1,855 words (approx. 7 pages at 300 words per page) |
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