Cost-Volume-Profit Analysis (CVP)
A planning tool that examines the relationship between costs, sales volume, and profit to determine break-even points and profit targets.
What is CVP Analysis?
Cost-volume-profit (CVP) analysis is a management accounting framework that examines how changes in costs and volume affect a company's operating profit. It uses the contribution margin — revenue minus variable costs — to calculate how many units must be sold to cover fixed costs (break-even point) and to reach target profit levels. Key assumptions of CVP analysis include that selling price is constant, costs are either purely fixed or variable, and all units produced are sold. Managers use CVP analysis for pricing decisions, product mix planning, and evaluating the impact of cost structure changes on profitability.
Example
A manufacturer sells a product for $50 with variable costs of $30 per unit (contribution margin: $20) and fixed costs of $100,000. The break-even point is $100,000 ÷ $20 = 5,000 units. To earn $40,000 in profit, the company must sell ($100,000 + $40,000) ÷ $20 = 7,000 units.