What does a cost-volume-profit (CVP) analysis help to understand?

Cost-volume-profit (CVP) analysis is a crucial tool in management accounting that helps businesses understand the interplay between costs, sales volume, and profit. Specifically, it provides insights into how changes in a company’s production costs and sales levels can affect both operating income and net income.

This analysis involves identifying how fixed and variable costs behave relative to changes in sales volume. For instance, under CVP, fixed costs remain constant regardless of sales volume, while variable costs change in proportion to the volume of goods sold. By utilizing CVP analysis, businesses can determine the breakeven point—the level of sales at which total revenues equal total costs, resulting in zero profit.

Moreover, it offers valuable information that aids in decision-making regarding pricing, product mix, and market strategies. By understanding the impact of varying levels of sales and costs, management can make more informed strategic choices reflecting the company's financial health and operational efficiency.

The other options, while related to financial performance, do not capture the core purpose of CVP analysis, which is specifically about understanding how changes in volume and costs impact profits directly.