M4A1 Discussion CVP Analysis
Peer 1
M4A1
Elizabeth Biggs posted Jul 10, 2018 1:00 PM
Importance of CVP
Cost-volume-profit (CVP) analysis considers the relationship between sales volumes, expenses, revenues and profits. It also answers a number of important questions about the profitability of a business’s products and services and CVP help managers achieve success in their company. CVP analysis helps analyze a single product, a group of products or the whole business. There are two main techniques that are used in the CVP analysis, which are the break-even analysis (BE) and the contribution margin analysis. The BE analysis is used to find the sales volume that you need to achieve in order to reach the break-even point under different price or cost scenarios. The contribution margin analysis, on the other hand, compares the profitability of different products, line or services that an organization offers. It is important for management to have good knowledge on the contribution margin analysis so that they make better decisions about whether to add or subtract a product line or how to price a product or service. The CVP analysis predicts the effect of sales growth on operating profit and the risks in increasing fixed costs if the volumes decrease (Blocher, Stout, Juras, & Cokins, 2013).
Importance of break-even point (BE)
For business owners who specialize in home technology, financial statements and accounting can be hard so it is important to conduct a break-even analysis to determine what sales volume is needed to cover costs. The break-even point is the production level where total revenues equal the total expenses. The break-even point is where the company produces the same amount of revenues as expenses during the manufacturing process or an accounting period. Some of the benefits of the break-even analysis is that it can be extended to show how changes in fixed cost-variable cost relationships will affect profit levels and break-even points. Also, using BE analysis indicates that the lowest amount of business activity necessary to prevent losses.
References:
Break-even point: Break-even analysis. Retrieved from http://www.12manage.com/methods_break-even_point.html
Blocher, E., Stout, D., Juras, P., & Cokins, G. (2013). Cost Management: A Strategic Emphasis. New York: The McGraw-Hill Companies, Inc.
M4 Assignment 1 Discussion
Hyung choe posted Jul 10, 2018 1:20 AM
Break-even point is the point where the level of total income equals the total costs of as business (Noreen et al., 2014). When we talk about the total costs of a business we mean both fixed and variable costs. This is the time in business when the additions equal the misfortunes. At this point, the business makes no profit or loss from the original investment. This point is important to every business since it tells the owners and managers of a business the volume of sales needed to cover both fixed and variable expenses of a business (Noreen, Brewer& Garrison 2014). Break-even point also helps the business owners to know the volume of sales after which the business will start making the profit.
At Break-even point
Revenues= Variable cost Fixed cost
We can also calculate the number of units to a break-even point, for example, given that a business is run with fixed expenses of $20,000 and variables costs per unit are $10. If the sale price of the product is $20, the number of units to break even can be calculated as follows
Selling price (SP)*Quantity (Q) = Variable expense (Ve) * Quantity (Q) +Fixed expense (Fe)
20*Q=10*Q+20,000
20Q=10Q+20,000
20Q-10Q=20,000
10Q=20,000
Q=20,000/10
Q=2000; therefore, 2000 units will be sold to break even. If the business makes sales amounting to 2000 units or $40,000 it will make no loss or profit.
CVP analysis
Cost volume analysis is applied in a business to determine the relationship between costs, volume and company’s operating income as well as net income (AUO, 2018). This analysis clarifies how changes in the volume of sales and costs affect the operating income and net income of a company. Some of the assumptions made while performing this analysis are constant unit price, constant fixed costs and constant variable costs per unit.
Importance of Break-even and CVP analysis
Calculating break-even point is a very important exercise to a business. First, it assists in setting the price. Knowing your various break-even points in your business can assist in setting long-term pricing strategies (ACCOUNTING FOR MANAGEMENT.ORG. 2018). For instance, after knowing that you have returned your initial investment after breaking even, you can lower the price of the commodity to increase sales revenue or maintain the price knowing that you will not make a loss. Also, break-even analysis helps business managers to make crucial financial decisions like depreciating the asset, cutting costs, reducing interest-bearing assets or reducing expenses in order to reach break-even point if the business is making the loss (ACCOUNTING FOR MANAGEMENT.ORG. 2018). In addition, break-even point analysis helps the business owners to know the progress of their business at any given point. Break-even analysis helps the business determine the number of units to be sold in order to make a profit.
Generally, CVP analysis helps in determining the productivity of the company’s products or administration. Also, the analysis provides the management with important working data to screen advance, evaluate execution and plan for the future.
References
Argosy University Classroom. (2016). Using CVP Analysis. Retrieved from
https://myclasses.argosy.edu/d2l/le/content/23941/viewContent/1153655/View
ACCOUNTING FOR MANAGEMENT.ORG. (2018). Break-even point analysis. Retrieved from
https://www.accountingformanagement.org/break-even-point-analysis/
Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.