Cost volume profit analysis (CVP) is the model used to analyze the behavior of net income in response to changes in total revenue, total cost, or both.
The cost volume profit (CVP) analysis model depends on understanding the effects of cost behavior on profit and identifying only the relevant relationship.
The following are limitations of cost volume profit analysis:
- The analysis of cost volume profit gives satisfactory results only if the elements of costs remain stable. But in actual practice, it varies.
- In business with many varieties of products, it becomes difficult to forecast the profits more accurately.
- It presumes that the anticipated capacity of production remains the same. But it may be increased depending upon the need.
- It again presumes that plant capacity remains the same. However, the volume, cost, and profit relationship do not hold good if manual labor is replaced by machines or high-cost materials are substituted with low-cost materials.
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