The basic assumptions of CVP analysis include:

1. Relational assumptions:

Because CVP analysis is developed on the basis of cost behavior analysis, the basic assumptions of cost behavior analysis also become the basic assumptions of CVP analysis, that is, within the relevant range, the total fixed costs remain unchanged, and the total variable costs change in direct proportion to the changes in business volume.

the former is expressed by mathematical model as y=a, and the latter is expressed by mathematical model as y=bx, so the total cost is linear with the business volume, that is, y=a+bx. Accordingly, it is assumed that the selling price remains unchanged within the relevant range, so there is a linear relationship between sales revenue and sales volume.

expressed by a mathematical model is a straight line y = px with the slope of the selling price (p is the selling unit price). In this way, within the relevant range, the cost and sales revenue are both shown as straight lines.

because of the assumption of correlation range and linear relationship, the fact that the cost and sales revenue are nonlinear with the business volume outside the correlation range is excluded. However, in actual economic activities, there is a nonlinear relationship among cost, sales revenue and business volume. In order to solve this problem, we will relax these assumptions later and discuss the situation under nonlinear conditions.

2. Stability assumption:

This assumption means that the proportion of sales revenue of each product in the total sales revenue will not change in an enterprise that produces and sells a variety of products. However, in real economic life, it is difficult for enterprises to always sell products according to a fixed variety structure.

if the variety structure of the products sold changes greatly, it will inevitably lead to a great difference between the profit expected under the assumption that the original variety structure remains unchanged. With this assumption, enterprise managers can pay attention to the influence of price, cost and business volume on operating profit.

3. Assumption of production and marketing balance:

The so-called production and marketing balance means that the products produced by enterprises can always be sold, and the production can be equal to the sales volume. Under this assumption, the quantity in the analysis of cost, volume and profit refers to the sales volume rather than the production volume. Furthermore, when the sales price remains unchanged, this quantity refers to the sales revenue. However, in actual economic life, the output may not be equal to the sales volume, and then the output factor will have an impact on the current profit.

CVP analysis is also called VCP analysis. It focuses on the quantitative relationship among sales quantity, price, cost and profit. The principles and methods it provides are widely used in management accounting, and it is also an important tool for enterprises to make decisions, plan and control.

Extended information:

First, the basic relationship in the analysis of cost, volume and profit:

1. When the total sales cost is fixed, the level of the break-even point depends on the level of the unit selling price. The higher the unit price, the lower the critical point of profit and loss; The lower the unit selling price, the higher the break-even point.

2. When the sales revenue is fixed, the critical point of profit and loss depends on the level of fixed cost and unit variable cost. The higher the fixed cost, or the higher the unit variable cost, the higher the break-even point; Conversely, the lower the break-even point.

3. On the premise that the critical point of profit and loss remains unchanged, the greater the sales volume, the more profits (or less losses) the enterprise will realize; The smaller the sales volume, the less profits (or more losses) the enterprise will realize.

4. Under the premise of constant sales volume, the lower the critical point of profit and loss, the more profits (or less losses) an enterprise can realize; The higher the break-even point, the less profits (or more losses) an enterprise can realize.

Second, the basic relationship in the analysis of cost-volume-profit:

The analysis of cost-volume-profit is based on the cost behavior analysis and the variable cost method, and its basic formula is the formula for calculating profit under the variable cost method, which reflects the relationship among the factors of price, cost, business volume and profit.

that is, pre-tax profit = sales revenue-total cost = sales price × sales volume-(variable cost+fixed cost) = sales unit price × sales volume-unit variable cost × sales volume-fixed cost. The relationship is: p = px-bx-a = (p-b) x-a.

note: in the formula, p represents pre-tax profit, p represents sales unit price, b represents unit variable cost, a represents fixed cost and x represents sales volume. This formula is the basic starting point of CVP analysis, and all future CVP analysis can be said to be based on this formula.

III. Prerequisites for the analysis of cost, volume and profit:

In real economic life, the relationship among cost, sales volume, price and profit is very complicated. For example, the relationship between cost and business volume may be linear or nonlinear; The relationship between sales revenue and sales volume is not necessarily linear, because the selling price may change.

in order to establish the theory of CVP analysis, we must make some basic assumptions about the above complex relationship, so as to strictly limit the scope of CVP analysis. If these basic assumptions are not met, we can conduct CVP expansion analysis.

Baidu encyclopedia -CVP (cost-volume-profit analysis)

Baidu encyclopedia-cost-volume-profit analysis.