Definition of Cost Volume Profit Analysis
Cost volume profit analysis is a study of the relationship between the cost of a product and profitability. The cost volume profit analysis also called CVP analysis assumes the marginal costing principle and determines the level of output that will attain the desired profit with the given costs. CVP assumes two types of costs; fixed cost and variable costs. When we deduct the variable cost from sales revenue we get the contribution margin that covers both fixed cost and profit.
Assume a company makes bicycles for $150 each and sell each for $250. The fixed costs of the company are $50,000. If the company wants to earn a profit of $10000 the required sales units can be calculated as follows.
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