Profit is the most important measure of the firm’s performance. In the free-market economy, profit is a guide for allocating resources efficiently. An analysis of the effects of various factors on profits is an essential step in the financial planning and decision-making.

The analytical technique used to study the behaviour of profit in response to the changes in volume, costs and prices is called the cost-volume-profit (CVP) analysis. It is a device used to determine the usefulness of the profit planning process of the firm. In fact, the entire field of profit planning has become associated with the CVP inter-relationships. However, it should be noted that' the formal profit planning and control also involves the use of budgets and other forecasts. As a starting point in the profit planning, CVP analysis helps to determine the minimum sales volume to avoid losses and the sales volume at which the profit goal of the rum will be achieved. As an ultimate objective, it helps management in seeking the most profitable combination of costs and volume. A dynamic management, therefore, uses CVP analysis to predict and evaluate the implications of its short-run decisions about fixed costs, variable costs, volume and selling price for its profit plans on a continuous basis. Generally, CVP analysis provides answers to questions such as:

1. What minimum level of sales need be achieved to avoid losses?
2. What should be the sales level to earn a target profit?
3. What will be the effect of changes in prices, costs and volume on profits?
4. How will profits be affected when sales mix is changed?
5. What will be new break-even point under (3) and (4) above?
6. What will be the impact of plant expansion on cost-volume-profit relationships?
7. Which product is the most profitable and which one is the least profitable?
8. Should sale of a product or operation of a plant be discontinued?
9. Should the firm be shut down temporarily?

The CVP analysis is of immense utility to management as it provides an insight into the effects and inter-relationship of factors, which influence profits of the firm. It is with the help of the CVP analysis that the finance executive is enabled to present facts and figures in accurate reports and intelligible charts to management for action.