Problem - The Cost-Volume-Profit (CVP) analysis is used to determine the company's operating income, and the net income and how they might be affected by the changing costs.
The CVP makes various assumptions in its application:
1. The behavior of both the costs and revenues is linear.
2. You can classify, relevantly, cost as fixed or variable.
3. Cost is only affected by changes in activities.
Decision makers use the CVP, however, because it determines the contribution of activities and the margin between the sales revenue and the variable expenses. Fixed costs are deducted from this margin to get the profit. This proves helpful in making decisions regarding investment and expansion of operations.
Please define break-even analysis? Explain.