What does cost-volume-profit analysis examine?

Cost-volume-profit (CVP) analysis is a financial tool used to understand how changes in a company’s sales volume affect its overall profitability. The core focus of CVP analysis is on the interplay between costs, sales volume, and profit, making it essential for managers in decision-making processes.

This analysis begins by identifying the break-even point, which is the sales volume at which total revenues equal total costs, resulting in zero profit. Beyond this point, any increase in sales volume contributes directly to profitability, as fixed costs remain unchanged while variable costs increase at a constant rate with each unit sold. Thus, CVP analysis helps businesses anticipate the effects of shifting sales volume on profitability, enabling informed strategic decisions regarding pricing, production, and inventory management.

The other options touch on relevant financial concepts but do not specifically address the primary focus of cost-volume-profit analysis. Operating expenses, pricing changes, and inventory levels can influence profitability, but CVP analysis is specifically concerned with how variations in sales volume directly impact profits.