Question: Background info

Cost-Volume-Profit (CVP) analysis is a computational method that analyzes the effect of sales and product costs on the operating income of a business. Specifically, it assesses the effect of changes in variable costs, fixed costs and selling price on operating income. Break-even analysis (with or without a target profit) is a common CVP approach. Another definition of break-even is where the total contribution margin equals total costs. A contribution margin income statement shows zero income at break-even.

Several assumptions underlie CVP analysis:

• All cost can be categorized as variable or fixed.

• Sales price per unit, variable cost per unit, and total fixed cost are constant.

• Mixed costs must be split into their fixed and variable component by an estimation process.

• Understanding the behavior of costs makes cost-volume-profit analysis possible.

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