Question
Discuss the concept of CVP Analysis. Describe the difference between CVP Analysis and Breakeven Analysis.
Answer :
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CVP analysis expands the use of information provided by break-even analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss. This break-even point can be an initial examination that precedes more detailed CVP analysis.
CVP analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:
- The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.)
- Costs can be classified accurately as either fixed or variable.
- Changes in activity are the only factors that affect costs.
- All
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