 First question we're going to have is why use cost volume profit analysis? What is cost volume profits analysis, CVP analysis? First we want to remember that this is a managerial accounting topic so when thinking about financial accounting we typically will not hear the term CVP cost volume profit analysis. We're not applying rules such as generally accepted accounting principles here and therefore we're not required in any way to have a cost volume profit analysis as CVP analysis. Why then would we do it? It's for decision making processes, it's for internal processes, it's for managerial accounting. One of the major benefits that a cost volume profit analysis will provide are planning tools. When we break things up into a cost volume profit a CVP analysis type of setup we have a much easier setup to run scenarios, to run plans, to run projections, to look out into the future and think about what could happen. Now you might think isn't that just what the financial statements are for? What about the normal income statement? Isn't that supposed to measure performance, show performance and help us to make decisions in the future? And the answer is yes, the financial statements do do that but there are some limitations in terms of forecasting. So remember when we think of a normal type of financial statement the income statement is usually what we're going to consider when we're considering performance. Those are the timing accounts, those are the accounts that are determining how we did over time. In essence revenue minus expenses. How much revenue did we have and how many expenses do we have to incur in order to help us to generate that revenue given us that bottom line number that net income. The difference usually is where we categorize the costs when we think about a normal type of income statement. We want to think about that income statement from the perspective usually of an outside user. Now again that doesn't mean that an inside user of managerial accountant doesn't take this same information but note that when we think about generally accepted accounting principles remember we're thinking mainly about the outside user. The outside user wants to see what really happened over the last year and they want to see the big picture view of that so that they can make investment decisions. And therefore the grouping of the expenses are going to be in alignment with that objective. So we have the revenue and then the expenses is what we're considering. We're considering here a manufacturing type of company usually broken out into cost of goods sold those things related to what we are selling. That's a category type of grouping. We're grouping anything that is related to the selling. Remember that if we make things we're talking about direct materials, direct wages, overhead a lot of things are going to go into that cost of goods sold number. As we consider it the different the behavior of those costs will be much different but we want to group them in this category by what they do. What do they do? They're there as part of the inventory that we used in order to sell to help generate the revenue. That's how we're grouping the expense. That gives us the gross profit and then we have the other types of expenses including the operating expenses of selling expenses and administrative expenses. Now again these administrative and selling expenses are in terms of what types of things they are for. They're clearly for selling and administrative and that's going to be their grouped by their function. They're not grouped by the behavior or how the costs act and therefore when we get to the net income then of course the net income is the gross profit minus the operating expenses that gives us our net income in a normal type of income statement for a manufacturing type of company. This gives a great summary of what has happened. It does so based on the groupings of why we made these expenses in terms of what it's doing for us to help us to achieve the goal of revenue generation. The problem is if we if we look out into the future and we start to run scenarios and say well what if we sell more stuff? What if we sell less stuff? It's more difficult for us to run through this entire type of income statement in a budgeted type of income statement in different scenario settings because the things that are involved in these different categories act differently as production level as the volume of production increases and decreases. So for example in cost of goods sold we might have the wages could increase to some degree by the people that are working hourly it might go up.