Question

How can CVP Analysis be used to predict future costs and profitability? Describe how CVP analysis is used, or could be used, at your current place of employment. If you have not worked for a company that might use CVP Analysis, you may choose a well-known company and describe how you envision that company using CVP Analysis. Try to discuss a concept associated with CVP not already addressed by your classmates. Consider using an article to summarize or apply the CVP concepts. Please reply with original posting and do not copy what's in Chegg.

Answer 1

Take an example of a Dairy plant processing milk.

There are two types of costs associated with production:

• Fixed costs
• Variable costs

Assume fixed costs per annum =$600,000

Fixed costs include depreciation of plant and machinery, salary of management staff , advertisement etc . These costs are fixed per year and do not change with the volume of production

Selling price per litre= $1

Variable cost per litre =$0.8

Variable costs are proportional to the volume of production like price paid for raw milk, cost of transportation ,energy costs etc

Total Cost =$600,000+0.8*Q

Q=Quantity of production and sales in litres

Total Revenue =$1*Q

Profit=(Total Revenue) –(Total Cost)

The following table gives the Revenue, Total Cost   and Profit at various level of sales:

Q	R	C	R-C
Volume of Sales(Litres)	Total Revenue	Total Cost	Profit
500,000	$        500,000	$ 1,000,000	$ (500,000)
1,000,000	$    1,000,000	$ 1,400,000	$ (400,000)
1,500,000	$    1,500,000	$ 1,800,000	$ (300,000)
2,000,000	$    2,000,000	$ 2,200,000	$ (200,000)
2,500,000	$    2,500,000	$ 2,600,000	$ (100,000)
3,000,000	$    3,000,000	$ 3,000,000	$               -
3,500,000	$    3,500,000	$ 3,400,000	$   100,000
4,000,000	$    4,000,000	$ 3,800,000	$   200,000
4,500,000	$    4,500,000	$ 4,200,000	$   300,000
5,000,000	$    5,000,000	$ 4,600,000	$   400,000
5,500,000	$    5,500,000	$ 5,000,000	$   500,000

It may be noted that at volume of sales of 3 million litres , there is Break Even(No Profit no loss).

Break even Sales=$3,000,000

Below Break even ,there is loss.

Above break even sales, there will be profit.

The difference between actual sales (if it is higher than breakeven) and the break even sales is the Safety level.

The Break even point can be calculated by following formula:

Break even Quantity=Fixed Costs/Unit contribution Margin=600000/($1-$0.8)= 3,000,000 Litre

The diagram for CVP(Cost Volume Profit ) is attached

CVP analysis is used in capital budgeting and strategy planning .

CVP analysis can be used to take decision regarding launching of a product, product pricing, target costing etc