Question

Why do firms use CVP (Cost-Volume-Profit) relationships?

A)to estimate profit at different sales volumes

B)to classify costs as variable or fixed

C)to determine cost of sales

D)to determine the profit per unit sold

Answer 1

A) To estimate profit at different sales volumes.

CVP(cost volume profit ) is a tool that helps the management to analyse relationship between cost , sale volume & profit.It means analyse how change in sales volume & cost affect company's operating Income.

It works on many assumptions

• Selling price per unit remains fixed.
• All produced unit will be sold.
• Variable cost per unit remains constant.
• Fixed Costs are fixed

It also helps to determine contribution margin per unit.

Contribution margin= Sales- Variable cost