Acc 550 - Cost Accounting - Final Project

Cost-Volume-Profit Analysis

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The cost-volume-profit analysis based on the cost classifications, illustrate that the firm make a net income of $94,475 before tax is imposed. The value of the contribution margin per unit is $6.50 while the contribution margin ratio is 52%. CVP is essential when it comes to the aspect of assisting in the management of the short-term economic plans. It is because it helps the managers to make better decisions regarding the ways through which the business can operate in a more effective way. One, it assists the managers to make precise decisions especially when it comes to answering pragmatic questions that are vital in the process of business analysis. For instance, it helps the managers to get to know the breakeven points of the company. Such knowledge is vital for the short term economic goals of the company. It is because the manager will be in a better position to tweak spending and seek ways to increase the production of the firm to increase the revenue realized in the business.

The CVP analysis is also much detailed, and it is mainly based on the statistical models that make the decisions taken by the management to be easily broken down into probabilities. It is a move that helps to make the most informed decision in the company. The analysis also provides a detailed snapshot of the business activities of the company. It aids the managers to get to know the variables that need alterations for the sake of the future survival of the company (Albrecht, 2007).

The break-even point quantity for the company stands at 45,465 units. These are the quantity of products that the firm can comfortably produce at the resources that are readily available in the firm. When the company manufactures this quantity of products, then it will not experience any shortage in the costs of production. The break-even revenue for the firm stands at $568,312.50. The company is breaking even because it can easily produce these amount of products with the materials that are available at the firm and still make profits. But, if it produces more than these then it will incur more costs of production and at the same time increase its revenue in the economy. The amount produced by the firm at the moment is what it can comfortably realize.

However, CVP analysis has certain implications for the planning of the company. The projections are mainly based on the cost estimates rather than the precise numbers. It is an anomaly that can result in inaccurate projections in the economy. They can make the firm take the unwanted path towards the realization of better economic gains in future. Also, the analysis mainly provides approximate answers to the hard questions regarding ways to run the business. The answers are not exact and, therefore, does not provide the true figures on the operations of the firm. It implies that the managers have to exercise a high level of extreme caution when it comes to the process of making decisions regarding the changes that need to be made on the financial positions and operations of the firm in the economy (Cafferky et al., 2010).

For the CVP analysis to be precise, it has to be done for each specific product, and it makes the entire process not only to be cumbersome but also time-consuming. The judgments have to be made regarding the results of the analysis after a very careful and deliberations have been taken into account. Investigations to ensure that the results from the statistical model are real may include observing the employees’ daily activities and interviewing them to get their opinions on the matter.

References

Albrecht, W. S. (2007). Accounting, concepts & applications. Mason, Ohio: Thomson/South-Western.

Cafferky, M. E., & Wentworth, J. (2010). Breakeven analysis: The conclusive guide to cost-volume-profit analysis. New York: Business Expert Press.