The relationship between cost volume and profit is shown by cost-volume-profit analysis. it is an analytical tool for analyzing the relationship among cost, price, profit, sales and production volume. Mainly there are three element in cost-volume-profit analysis.
It is highly essential for the management to have the complete knowledge about the inter relationship among the cost, volume and profit. for this purpose cost-volume-profit analysis can be regarded as a sophisticated method or analytical tool used in management.
(1) What sales volume is needed to break-even?
(2) What sales volume is necessary to earn a desired net profit?
(3) How will the change in selling price affect the profit position of the company?
(4) How will the change in cost affect profit?
(5) Which product or product mix is profitable?
(6) Which product or operation of a plant should be discontinued?
(7) What will be new break even sales if these certain changes on fixed and variable cost?