Break-even analysis is a technique widely used by production management and management accountants. Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point").
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:
1. Prices will remain fixed
2. Variable cost rate will remain fixed
3. Total fixed costs will remain fixed up to maximum manufacturing capacity of the firm
4. Quantity of units produced = quantity of unit sold, so there is no change in inventory.
5. Costs can be classified accurately as either fixed or variable.
6. All units produced are sold
7. Changes in activity are the only factors that affect costs
8. When a company sells more than one type of product, the sales mix (the ratio of each
product to total sales) will remain constant.
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:
1. Prices will remain fixed
2. Variable cost rate will remain fixed
3. Total fixed costs will remain fixed up to maximum manufacturing capacity of the firm
4. Quantity of units produced = quantity of unit sold, so there is no change in inventory.
5. Costs can be classified accurately as either fixed or variable.
6. All units produced are sold
7. Changes in activity are the only factors that affect costs
8. When a company sells more than one type of product, the sales mix (the ratio of each
product to total sales) will remain constant.
