Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 4

Compare cost-volume-profit (CVP) analysis with profit-volume analysis. How do they differ?

Step 1 of 3

Cost-volume-profit-analysis is a financial modeling method that talks about break-even point basically. Thus in this modeling, we are more concerned with the zero profit-zero loss scenario where the profit equation is equated to zero.

In this context, the main focus is on achieving the break-even sales and the contribution margin. The sales volume, selling price and variable cost per unit are the main entities.

This gives rise to the contribution margin which offsets the fixed cost of the company. Here the actual sales volume, production capacity and the overheads leading to fixed cost are the key parameters of the model.