Unit 4: Cost-Volume-Profit Analysis
In this unit we explore the relationships that revolve around costs, volume, and profit (CVP), and how companies plan for profitability. We examine how business managers use costs, volume, and profit to calculate how much they need to produce to achieve the break-even point and generate future profits. For example, a chief executive officer of a company that manufactures snowboards should know how many boards they need to produce to cover their costs and earn a decent profit by end the month.
Breakeven analysis is synonymous with CVP analysis and identifies how changes in key variables impact financial projections and profitability.
Completing this unit should take you approximately 3 hours.
In this unit you saw how cost-volume-profit analysis (also known as break-even analysis) is used for financial decision-making. The CVP method makes predictions and those predictions are subject to variance. Fortunately, CVP can provide a measure of sensitivity of profits to the CVP variables. You also saw that CVP was able to provide information on how production should be managed when production inputs are constrained. In the next unit you will learn about differential analysis, another tool for managers to use in dealing with uncertainty.