Question

What terms do you think are most important to the viability and financial stability and success?

cost profit volume

fixed cost

profit volume ratio

variable cost

break even analysis

Answer 1

What terms do you think are most important to the viability and financial stability and success?

cost profit volume

Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that varying levels of costs and volume have on operating profit. ... The cost-volume-profit analysis makes several assumptions, including that the sales price, fixed costs, and variable cost per unit are constant

For your business to be successful, you must understand the kinds of expenses you'll encounter to keep track of them. The type of expenses your business will have is known as the cost structure, which are the costs your business will incur. There are typically two types of expenses that make up the cost structure: fixed costs and variable costs. Fixed costs are costs that do not change regardless of the output that your business produces; variable costs are costs that change with the volume of production.

Key elements of a cost structure

Fixed and variable costs are the two types of expenses that make up cost structure, so it's important to understand what the elements of these expenses are. For example, variable costs include expenses such as heating, water, and lighting for daily operations and materials required for production; these costs are not fixed, because they change depending on production. Other elements of cost structure may include direct or indirect materials, direct labor, office salary and works in progress.

Classifying an expense as fixed or variable is determined by how a particular expense fluctuates with sales volume. If an expense increases when sales increase, it's a variable expense. If an expense remains constant when sales increase, it's a fixed expense. Fixed costs plus variable costs equal total costs

The relationship between sales and expenses

If you want to know how your expenses fluctuate with sales volume, then you must understand unit costs. Because fixed costs don't change as sales volume changes, the fixed cost per unit changes.

To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts. Profitability is, of course, critical to a company's existence, but growth is crucial to long-term survival

KEY TAKEAWAYS

• When evaluating a company, what should you weigh heavier: profitability or growth?
• A growing company may not be earning any profits yet, but may nevertheless provide a great investment opportunity.
• Other times, a lack of profitability can be a huge red flag that something is wrong with the firm.

A company's net profit is the revenue after all the expenses related to the manufacture, production, and selling of products are deducted. Profit is "money in the bank." It goes directly to the owners of a company or shareholders, or it is reinvested in the company. Profit, for any company, is the primary goal, and with a company that does not initially have investors or financing, profit may be the corporation’s only capital.

Without sufficient capital or the financial resources used to sustain and run a company, business failure is imminent. No business can survive for a significant amount of time without making a profit, though measuring a company's profitability, both current and future, is critical in evaluating the company.

Although a company can use financing to sustain itself financially for a time, it is ultimately a liability, not an asset.

An income statement shows not only a company’s profitability but also its costs and expenses during a specific period, usually over the course of a year. To compute profitability, the income statement is essential to create a profitability ratio. A number of different profitability ratios can be calculated from which to analyze a company's financial condition.

Profitability and growth go hand-in-hand when it comes to success in business. Profit is key to basic financial survival as a corporate entity, while growth is key to profit and long-term success. Investors should weigh each factor as it relates to a particular company.

^{fixed cost}

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any specific business activities. In general, companies can have two types of costs, fixed costs or variable costs, which together result in their total costs. Shutdown points tend to be applied to reduce fixed costs.

companies have a wide range of different costs associated with their business. These costs are broken out by indirect, direct, and capital costs on the income statement and notated as either short-term or long-term liabilities on the balance sheet. Together both fixed costs and variable costs make up the total cost structure of a company. Cost analysts are responsible for analyzing both fixed and variable costs through various types of cost structure analysis. In general, costs are a key factor influencing total profitability

KEY TAKEAWAYS

• Cost structure management is an important part of business analysis that looks at the effects of fixed and variable costs on a business overall.
• Fixed costs are set over a specified period of time and do not change with production levels.
• Fixed costs can be direct or indirect expenses and therefore may influence profitability at different points along the income statement.

Financial Statement Analysis

Companies can associate both fixed and variable costs when analyzing costs per unit. As such, cost of goods sold can include both variable and fixed costs. Comprehensively, all costs directly associated with the production of a good are summed collectively and subtracted from revenue to arrive at gross profit. Variable and fixed cost accounting will vary for each company depending on the costs they are working with. Economies of scale can also be a factor for companies who can produce large quantities of goods. Fixed costs can be a contributor to better economies of scale because fixed costs can decrease per unit when larger quantities are produced. Fixed costs that may be directly associated with production will vary by company but can include costs like direct labor and rent.

Fixed costs are also allocated in the indirect expense section of the income statement which leads to operating profit. Depreciation is one common fixed cost that is recorded as an indirect expense. Companies create a depreciation expense schedule for asset investments with values falling over time. For example, a company might buy machinery for a manufacturing assembly line that is expensed over time using depreciation. Another primary fixed, indirect cost is salaries for management.

Companies will also have interest payments as fixed costs which are a factor for net income. Fixed interest expenses are deducted from operating profit to arrive at net profit.

Any fixed costs on the income statement are also accounted for on the balance sheet and cash flow statement. Fixed costs on the balance sheet may be either short-term or long-term liabilities. Finally, any cash paid for the expenses of fixed costs is shown on the cash flow statement. In general, the opportunity to lower fixed costs can benefit a company’s bottom line by reducing expenses and increasing profit.

What is break-even analysis?

A break-even analysis is a useful tool for determining at what point your company, or a new product or service, will be profitable. Put another way, it’s a financial calculation used to determine the number of products or services you need to sell to at least cover your costs. When you’ve broken even, you are neither losing money nor making money, but all your costs have been covered.

There are a few definitions you need to know in order to understand break-even analysis.

• Fixed Costs: Expenses that stay the same no matter how much you sell.
• Variable Costs: Expenses that fluctuate up and down with sales.

components of Break Even Analysis

Fixed costs
Fixed costs are also called as the overhead cost. These overhead costs occur after the decision to start an economic activity is taken and these costs are directly related to the level of production, but not the quantity of production. Fixed costs include (but are not limited to) interest, taxes, salaries, rent, depreciation costs, labour costs, energy costs etc. These costs are fixed no matter how much you sell.
Variable costs
Variable costs are costs that will increase or decrease in direct relation to the production volume. These cost include cost of raw material, packaging cost, fuel and other costs that are directly related to the production.

Ways to monitor Break even point

• Pricing analysis: Minimize or eliminate the use of coupons or other price reductions offers, since such promotional strategies increase the breakeven point.
• Technology analysis: Implementing any technology that can enhance the business efficiency, thus increasing capacity with no extra cost.
• Cost analysis: Reviewing all fixed costs constantly to verify if any can be eliminated can surely help. Also, review the total variable costs to see if they can be eliminated. This analysis will increase the margin and reduce the breakeven point.
• Margin analysis: Push sales of the highest-margin (high contribution earning) items and pay close attention to product margins, thus reducing the breakeven point.
• Outsourcing: If an activity consists of a fixed cost, try to outsource such activity (whenever possible), which reduces the breakeven point.