Cost-volume-profit (CVP) analysis helps managers predict how changes in which of the following factors will affect a company's net income?

• A. Tax rates only
• B. Sales volume, costs, and selling prices
• C. Inventory valuation methods only
• D. Depreciation methods

Answer: (B)

Verified step by step guidance

1. Understand the concept of Cost-Volume-Profit (CVP) analysis: CVP analysis is a financial tool used to determine how changes in sales volume, costs, and selling prices impact a company's net income. It helps managers make decisions about pricing, production levels, and cost management.
2. Identify the key factors in CVP analysis: The three main factors are sales volume, costs (both fixed and variable), and selling prices. These factors are interconnected and directly influence the company's profitability.
3. Recognize why tax rates, inventory valuation methods, and depreciation methods are not the focus of CVP analysis: While these factors affect financial reporting and tax calculations, they do not directly impact the operational relationship between sales, costs, and profits, which is the primary focus of CVP analysis.
4. Learn the formula used in CVP analysis: The basic formula is \( \text{Net Income} = \text{Sales Revenue} - \text{Variable Costs} - \text{Fixed Costs} \). This formula helps managers analyze how changes in sales volume, costs, and selling prices affect net income.
5. Apply CVP analysis in decision-making: Managers use CVP analysis to evaluate scenarios such as increasing sales volume, adjusting selling prices, or reducing costs. This helps them predict the impact on net income and make informed business decisions.