Question

Based on the text reading and other materials used, explain when a manager would use cost-volume-profit analysis and sensitivity analysis. In addition to the discussion, suppose a company decided to automate a production line. Explain what effects this would have on a company's cost structure using CVP terminology. Could these changes have any possible negative effect on the firm?

One of the focuses of CVP analysis is breakeven analysis. Specifically, CVP analysis helps managers of firms analyze what it will take in sales for their firm to break even.

Answer 1

Cost volume analysis will be helpful for manager in order to determine the level of net income and operating income and changes in them due to change in the cost and volumes so it will determine the appropriate mix of product cost and volume for the company.

sensitivity analysis will be helpful in order to determine the sensitivity of the organisation to various macroeconomic factors and other factors and changing in those factors will be leading to changing in overall production and demand along with supply and profits.

Automation of of production line will be leading to increase in the overall cost for the business but it will also increase in profits for the business so it can have negative impact on the operating front as the operating income will be going down

Cost-volume-profit analysis will also be helpful in determination of the break even point and it will help in determining a level at which the total cost will be equal to total sales and the benefit and the cost will be adequately analysed.