CVP Analysis.html

CVP Analysis

Management can use CVP analysis in many areas. This analysis is referred to as break-even analysis because it tells managers much more in addition to determining the break-even point of an operation. The CVP analysis tells management a great deal of information including the relationships between the revenues, costs, and profits of a company. It is especially useful to management when determining what the cost structure of the company should be in the long term (or the planning period).

A basic CVP model shows fixed costs at a certain level, with variable costs increasing at a given rate as the output increases. In addition to breakeven points, a CVP analysis helps management determine the effects of a change in the price on the revenues, given a cost structure or a proposed change in the cost structure of the company. The management can also apply a CVP analysis to determine the amount of operating leverage it decides to employ. The operating leverage refers to the amount of fixed costs a company decides to use in its operations, relative to variable inputs.

As a manager, when you are making decisions for the company, you need to consider the distinction between how the decisions will impact the company in the short term and in the long term. You can classify the company’s operations as short term or long term.