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A study on linear deterministic and non linear modeling of Cost-Volume-Profit Analysis.

Introduction: Earning of Maximum profit is the ultimate objective of business

organization. Profit is determined by a number of factors, both internal and external, one such factor is sales revenue. Sales revenue increase means increase in profits. Sales is itself depends on other factors such as demand for the product, the competition etc. The other factor that determines the amount of profit is the cost of production. A reduced cost of production will result in increase in profits, but profit is more closely related to volume rather than cost because cost seldom vary indirect proportion to volume. Hence a small change in volume has a significant effect on profit. It is duty of the Mgmt to consider cost and volume while planning the profit earning capacity of the organization. The technique used for this is CVP ANALYSIS. A cost-volume-profit (CVP) analysis is a systematic method of examining the effects of changes in an organizations volume of activity on its costs, revenue and profit. It is widely used tool for managerial planning. (CVP Analysis) is the study of the relationship between revenues, costs and profits of a business. The analysis is used to examine the relationship among the total volume of an independent variable, total costs, total revenues and profits for a time period. It is also useful in the early stages of planning because it provides an easily understandable framework for discussing planning issues and organizing relevant data. It is a way to answer a number of important questions about the profitability of a companys product of services. It examines the behavior of total revenues, total costs, and
operating income (profit) as changes occur in the output level, selling price, variable cost per unit, and or fixed costs of a product or service and relationship of cost and profit to the volume of business with a view to maximize profits. It also forecast the profits accurately and

facilitates in the preparation of flexible budgets. It helps Mgmt in determining pricing policies and charging of overheads to cost of production at different level of operation. CVP is used to build an understanding of the relationship between costs, business volume, and profitability. The analysis focuses on the interplay of pricing, volume, variable and fixed costs, and product mix. This analysis will drive decisions about what products to offer, how to price them, and how to manage an organizations cost structure. CVP is at the heart of techniques that are useful for calculating the break-even point, volume levels necessary to achieve targeted income levels, and similar computations. Using cvp we can analyze a single product/group of products and evaluate entire business as a whole. It breaks down the cost into fixed and variable and then uses this information for rational decision making.

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