The Cost-Volume-Profit Analysis

Typically, net profit is measured on a quarterly or annual basis. When compared with a company net profit during other periods, it can provide a useful measure for how profitable a company is over time and the overall performance of the company & management team.

the harsh financial situation faced by Continental as a result of the recent financial crisis

Because each product has a different contribution margin percentage, the volume required for each break-even point would be different and will not add up to the company’s overall break-even volume of 1,100,000 units; the overall break-even volume assumes that there is only one contribution margin percentage which is :

The breakeven point is used my companies to prevent loss. The Cost Volume Profit (CVP) is the tool in which to capture the breakeven point. Sometimes it is referred to as the breakeven analysis. The CVP assists the company in identifying future operation need, production costs, and expansion possibilities based on estimating costs, prices, and volumes. This profit response can help Competition Bikes determine the amount of needed sales, what products to manufacture, pricing policies, marketing strategies, and how much profit is actually needed. In this analysis we will assume

This description makes the marketing expenditures sound like they are a variable cost, since it suggests that they vary with the amount of units sold. However, unlike variable costs, the relationship of marketing costs is not directly proportional to sales, since other factors also influence units sold. Thus, it is not a pure variable cost. However, it is also not a fixed cost, in that there usually is a relationship between marketing expenditures and sales. For CVP purposes, it might best be handled as a mixed cost, having both a fixed and variable

As upper-level management it is important to understand the key components of cost-volume-profit analysis. Identifying objectives including concepts related to CVP is crucial to the absorption of information.

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Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses. There are several different uses for the equation, but all of them deal with managerial accounting and cost management (Break-Even Point, n.d.)

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Break even analysis can be used to decide whether to alter the existing product emphasis or not. For example in this case, if we refer last year’s data, we can see that the product C is not economically feasible to manufacture at $2.40 / unit. Following table gives the analysis for checking whether the company can afford to invest in additional “C” capacity.

A company's break-even point is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss. Calculating the break-even point (through break-even analysis) can provide a simple, yet powerful quantitative tool for managers. In its simplest form, break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans.

Based on the real world functioning of businesses, every organization that deals with the process of manufacturing of certain products operates in accordance with the main principle of maximizing its profits. During the performance of daily activities, many business managers face a series of questions related to planning, control and decision making. In order to give answers to all these questions, an additional analysis needs to be considered. It is very important for managers to plan carefully how they are going to generate sufficient money to pay down costs and, in this way to result with a profit. As managers are interested in having the adequate information about the influence that certain actions might have on the profitability of the business, "Cost Volume and Profit" analysis plays a significant role by being a potential tool in facilitating the process of making the right decisions regarding planning and control in order to add value to the company. (Trifan and Anton, 2011). To further illustrate the essential impact that CVP analysis has on management authorities in making better decisions, I will refer to and analyze the case of the Hampshire Company which follows as below.

Unfortunately, not all companies are as benign and have the ability to define all their variables, especially when their product is so diverse and complex. Gupta states, “in virtual enterprises it is important to adopt a costing system based on performance and indentifying critical success factors and tracing the measures and metrics to those factors that would ultimately lead to an improved organizational performance and competitiveness and value” (Gupta , 2005). Simply put, due to companies evolving, their way of measuring their success can be better understood through a CVP analysis. But, due to the complexities and many assumptions created by that analysis, I would have to disagree. Gupta also states, “the cost and performance measures in “New Enterprises” have to focus on delivering value rather than merely trying to establish the historical cost (2005). I find this statement very relevant because historical cost only allows the company to see the beginning and the end, and separates them from the present. Understanding the present and ongoing cost is important in determining value of a product and corporation because it possesses the true and present success.

This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 8-2 The term unit contribution margin refers to the contribution that

Cost behavior is one of the most important aspect which helps in analyzing the nature and responses of different costs. Generally the cost behavior is breakdown of costs into fixed and variable components. The cost behavior is usually analyzed with the help of CVP analysis. The cost behavior patterns are analyzed by cost-volume-profit analysis, including the calculation of a firm 's break-even point in units and sales dollars.