Question

Does one need to understand the relationship between cost, volume, and profit to be a successful business person? Why or why not?

Answer 1

Yes, the one who does business should know about the cost (expenses incurred during the course of producing a product), volume (how many units or at what level, it will give more profits and Profits (earnings in the course of operating or daily activities.

The main reason is that doing business requires investment, cost of capital, incurring costs and other expenses which need to be sacrificed more through sales revenue or service revenue will give the profit. In simple words, the amount of Sales revenue or Service revenue should always be more than the expenses incurred in that particular period so that the result which is called profit will be earned because the main purpose of the business is to earn profits in order to grow further.

Therefore, the one who does business should required to know about the cost, volume and profit. There is a theory called Cost Volume Profit Analysis (CVP Analysis) which states that the how costs and volume changes which will have an impact on the profits.