Limitations of Cost-Volume-Profit (CVP) Analysis:

Cost volume profit (CVP) is a short run, marginal analysis: it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between fixed costs and variable costs, though in the long run all costs are variable. For longer-term analysis that considers the entire life-cycle of a product, one therefore often prefers activity-based costing or throughput accounting.

You may also be interested in other relevant articles:

• Contribution Margin and Basics of CVP Analysis
• Difference Between Gross Margin and Contribution Margin
• Cost volume profit (CVP) relationship in graphic form
• Contribution margin ratio (CM ratio)
• Importance of the contribution margin
• CVP consideration in choosing a cost structure
• Operating leverage--degree of operating leverage
• Assumptions of CVP analysis
• Break even point analysis
• Target profit analysis
• Margin of safety
• Sales mix and break even with multiple products
• Limitations of Cost Volume Profit Analysis

 

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