What does the term 'cost-volume-profit analysis' refer to?

Cost-volume-profit analysis refers to the study of the relationship between costs, sales volume, and profitability. This analytical tool helps businesses understand how changes in cost and volume affect a company's operating income and net income. It allows for the identification of the break-even point, which is the level of sales at which total revenues equal total costs, resulting in no profit or loss. This analysis is crucial for decision-making because it highlights how different factors influence profitability, enabling firms to adjust pricing strategies, control costs, and make informed production decisions based on sales forecasts.

Understanding this relationship is vital for businesses as it aids in planning and assists in determining how many units need to be sold at different price levels to achieve desired profit targets, making this a fundamental concept in managerial accounting.