Question

In this discussion question you will management assessment tools.

Cost-volume-profit may be one of the most valuable assessment tools available to management. Discuss why CVP is so important and provide a real life example you may have been involved in or find of interest as far as break-even for a product/service.

Answer 1

Cost-Volume-Profit analytical tool is used for examining the relationship between price, volume, cost, and profits of a firm. It is used as a major part of marginal costing and is an essential part of the profit planning policy.

Talking about its importance, it is one of the important analysis tools in management as it The CVP analysis is very much useful to management as it contributes to the impacts and inter-relationship of aspects that influence the profits of the firm. As everyone knows the fact, the relationship between volume, costs of products and profit makes up the revenue system of a firm and so it becomes necessary for budgeting and profit planning. It assists in determining the maximum sales volume to prevent damages also.

The formula of CVP analysis is: number of units sold×price per unit = number of unit sold×variable cost unit+fixed cost+ profit

For example, I started a company of fans. I wanted to make $10000 by selling 1000 fans. The fixed cost is $20000 while the variable cost per widget is $2. If I put this in the formula;

1000p = (1000)($2) + $20000 + $10000

I got to sell basically

1000p = $50000

p = $50. Here, p stands for price per unit sold. V stands for variable cost per unit sold. So, to earn the desired profits, I sold each fan at $50.

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