Thus, PVR = (5 / 20) x 100 = 25%.Ī high PVR indicates high profitability. This ratio, expressed as a percentage, correlates with contribution and sales. The profit-volume ratio (PVR) helps determine the profitability of the business. (iv) Deciding between men and machinery: CVP analysis helps determine which suitable method to adopt for manufacturing a particular product: machinery or man. Matching the purchase price to the cost of output helps make this choice. (iii) Making purchase decisions: CVP analysis helps decide whether to buy a product from the market or produce it. (ii) Selecting the best alternative: CVP analysis helps to clarify the most suitable course of action. (i) Determining output volume: Knowing the most profitable level of output aids operations and ensures that production capacity is optimally utilized. Importance of CVPĬVP analysis is important because it assists in the following areas: Volume is the most crucial factor that affects cost. Thus, cost-volume-profit (CVP) analysis measures changes in cost in relation to changes in volume. In turn, this depends on the volume of production, which bears a relationship to the cost. Profit depends on sales, the sales price depends on the cost, and the volume of sales depends on the volume of production.
These three factors of cost, volume, and profit share a connection and are interdependent. The most crucial include the manufacturing cost, the volume of sales, and the selling price of the product.
Updated on SeptemCost-Volume-Profit (CVP) Analysis
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