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Cost-Volume-Profit (CVP) Analysis

Suppose the following income statement represents our performance last month, and we’re predicting that sales volume will drop by 10%. Will our profits also go down by approximately 10% to $3,600? The answer is almost certainly not, even if our underlying cost structure remains the same. In fact, we’re likely to do far worse than $3,600.

The estimate that profits will drop 10% implicitly assumes that all our costs move proport...


Cover of Financial Literacy for Managers: Finance and Accounting for Better Decision-Making


Subject Overview
Finances must be considered at all phases of a project and whenever a decision must be made. The lessons in this section explain how to use financial data to make effective decisions and how to assess your projects so they can be successful. Prepare yourself to make fiscally sound decisions by understanding:

  • The relationship between cost, sales volume, and profit
  • How to set prices for special orders and special classes of customers
  • How to evaluate resource constraints to maximize profitability
  • How cost allocation affects profitability
  • How to project cash flow when assessing potential projects or initiatives

Lesson Introduct...