CVP (Cost-Volume-Profit) analysis and breakeven analysis are two techniques used in managerial accounting for planning and decision-making purposes.
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Here is an explanation of each:
CVP Analysis:
CVP analysis is a technique used to study the relationship between costs, volume, and profit. It involves analyzing the effects of changes in sales volume, cost structure, and selling price on the profit of the business. CVP analysis helps businesses determine the optimal sales volume required to cover all the costs and generate a target profit. It involves calculating the contribution margin, which is the difference between the selling price and variable cost per unit. The contribution margin helps businesses determine the breakeven point, which is the point at which the total revenue equals the total costs, and beyond which the business starts generating profits.
Breakeven Analysis:
Breakeven analysis is a technique used to determine the level of sales required to cover all the costs of the business, without generating any profit or loss. It is the point at which the total revenue equals the total costs, and the profit is zero. Breakeven analysis is a useful tool for businesses to determine the minimum sales volume required to avoid losses. It helps businesses understand the impact of changes in variable costs, fixed costs, and selling price on the breakeven point.
In summary, CVP analysis is a technique used to study the relationship between costs, volume, and profit, and helps businesses determine the optimal sales volume required to cover all the costs and generate a target profit. Breakeven analysis, on the other hand, is a technique used to determine the level of sales required to cover all the costs of the business, without generating any profit or loss. Both techniques are used in managerial accounting for planning and decision-making purposes, but they have different applications and focuses.