Cost-Volume-profit (CVP) analysis is a powerful tool that helps managers understand the relationships among cost, volume, and profit. CVP focuses on how profits are affected by the following five elements:

1. Prices of Products

2. Volume or level of activity

3. Per unit Variable Costs

4. Total Fixed Costs

5. Mix of products sold for multi-product companies.

Because CVP analysis helps managers understand how profits are affected by these key factors, it is a vital tool in many business decisions. These decisions include what products to manufacture and services to offer, what marketing strategy to adopt and what cost structures to implement. Careful stud of the elements and assumptions, however is needed to avoid mistakes.

Select a product that you could make yourself. Examples would be cookies, birdhouse, jewelry or any custom product.

Assume you start a business producing and selling your product. You will be applying the concepts of CVP analysis to this potential venture.

Required:

1. Describe your product, what market are you targeting this product for? Develop a pricing strategy to determine your selling price. What price will you sell it for?

2. Make a detailed list of all direct materials including quantities, cost of material/unit.

3. List all other expenses(fixed & variable) including labour, rent, utilities, insurance, etc.

4. Calculate break even dollars and margin of safety for the upcoming year.

5. Summarize your data - how realistic is your venture, how many units will you need to sell to break even, what risks will you perhaps encounter, other issues...