COST-VOLUME PROFIT (C-V-P) ANALYSIS INTRODUCTION

You can employ cost-volume-profit analysis to examine the natural relationship among cost, volume, and profit in pricing decisions. In cost-volume-profit study, you:

• Must consider only short-term operations. The short term might be stated as a period too short to allow facilities expansion or contraction or other changes which might affect total pricing relationships.

• Suppose that a straight line can reasonably be employed in analysis. Whereas actual price behavior might not obey a straight line, its use can closely estimate actual cost behavior in the short run.

• When purchase volume moves exterior the relevant range of the accessible data, the straight-line supposition and the accurateness of estimates become questionable.

• When you know which product variable costs per unit are reducing as quantity rises, consider employing the log-linear improvement curve concept. Improvement curves are specifically helpful in limited production circumstances where you can acquire cost or price information for all units sold.