Benefits of Using CVP Analysis - 550 Words

Benefits of Using CVP Analysis (Essay Sample) Content: Benefits of Using CVP Analysis Name Institutional Affiliation Instructor Date of submission CVP involves the determination of either of the variables (cost, profit or volume) given a relevant set of data. This includes the price per unit, cost per unit, fixed cost, and/ or profit. CVP is applied to long term of a business and uses cost behavior theory to determine the quantity to be produced and sold to achieve a break- even point (Kimmel, 2011).For every organization, profit is influenced by a large number of factors, the key being the volume of sales and the cost of manufacturing and these factors are inter-reliant. Volume of sales is influenced by the market forces and the volume of production which in turn is related to costs. Management has no influence over market. Therefore, to achieve the projected level of profitability, management has to exercise control over management of costs, largely variable cost (Shim, 2012). This is due to the fact that fixed cost is a non-controllable constant cost and is irrelevant for decision making.The investment cost ($850000) is aff ected, with either an increase or a decrease due to the following factors. These factors will to a large extent depict whether the investment is worth or not.ÂÂ · The impact of inflation has an influence on material prices, wage rates and overhead costs.ÂÂ · Where scrap is expected to fall, material usage may change due to improved methods, better material quality and better trained workers.ÂÂ · Where there is improved training programs, labor efficiency may change or a decrease in labor turnover is expected to take place.ÂÂ · The size of batches or product volume of production.ÂÂ · The Product mix may change either as part of increased competition or due to overall company strategy.ÂÂ · The state of technology and the methods of production.ÂÂ · The size of plant also dictates whether there will be an increase or a decrease in the investment cost.The following are the main limitations and assumptions in the cost-volume-profit analysis:1. It is assu med that the production facilities projected for the purpose of CVP analysis do not endure any change. Such analysis results to misleading results if reduction or expansion of capacity takes place, which in most cases does.2. It is difficult to predict with reasonable precision, the volume of sales mix which would elevate profit in case a variety of products with varying margins of profit are manufactured.3. CVP analysis assumes that selling price and input price remain fairly constant which in actuality it is not the case. Therefore, if selling price or cost changes, the relationship between profit and cost won't be accurately depicted.4. CVP analysis assumes that variable costs are completely and perfectly variable ...