CHAPTER-I

INTRODUCTION

1.1 Background of the Study

A business is generally driven by profit motive and a successful business is one which is able to
yield higher level of profits. However, a business organization is faced with limited resources
and their proper utilization requires an efficient management. This study centers around Nepal
Lube Oil Ltd which is no exception to the major objective of achieving profits for which either
sales need to be increased or costs of production reduced. There are various management
accounting tools that have proved beneficial in every aspect of management activities from
planning to decision making. Cost-Volume-Profit analysis is an analytical tool that studies the
short term relationship between sales revenue, costs and profits. There are three elements of CVP
analysis which are inter- related. It`s analysis examines the output level, the selling price, the
variable cost per unit and fixed cost of product. CVP analysis is a systematic method of
examining the relationship between changes in output and changes in total sales revenue,
expenses and net profit. A popular technique to study CVP relationship is break-even which
explains how a small change in one variable impacts rest of the variables. It is a budgeting tool
of operating activity and provides information about the organization. Cost-Volume-Profit
analysis is a simple but flexible tool for exploring potential profit based of cost strategies and
pricing decisions.

CVP analysis is an important tool for the management professionals that assists in profit
planning and a method of cost accounting. CVP analysis is based upon determining the
breakeven point of cost of production and volume of goods produced. It makes several
assumptions such as the sales price, fixed costs and variable cost per unit are constant. To
perform this analysis, several equations are used that take price, cost and other variables and
plotting them out on an economic graph. CVP is regarded as one of the sharpest tools of profit
planning and control (PPC). It is because, CVP provides wider picture of how different level of
activities (i.e. Sales revenue) cause change in total cost and profitability of the venture. First, it
provides the wider picture of the relationship between company cost and sales revenue. Further it
suggests the level of sales and cost Figures to fix the profit plans. Therefore, CVP is regarded as
one of the accounting tools of managerial decision