Question

This week has focused on using several cost analysis tools to determine how well products contribute to a company’s profitability. However, all of these tools are internally used and not required to be published outside of an organization. Instead, external stakeholders rely on the three key financial statements reviewed in Unit 1:

• Income Statement
• Balance Sheet
• Statement of Cash Flows)

If a company’s CVP analyses showed it was not operating at break-even, where on the financial statements might one be able to see this impact (i.e., specific line items on the statements)?

As portfolio activities are to be self-reflective, please make sure to connect the portfolio assignment to:

• Your personal experiences
• Course readings and any external readings.
• Discussion forum posts or other course objectives that tie into your reflection.

The Portfolio Activity entry should be a minimum of 500 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources.

Answer 1

Cost-volume-profit (CVP) analysis is used to calculate how changes in costs and volume affect a company's operating income and net income. It states about the company's financial position.

Since the company is operating below Break even, that means it's incurring losses. Hence, profit is negative.

Another factor is fixed cost and variable cost that also helps in decision making about any company. Fixed cost remains the same whereas variable cost changes as per production level. Therefore even if the company is incurring losses while utilizing below its full capacity. There is always a scope of profit, as in future when company will produce in its full capacity, only variable cost will be increasing whereas fixed cost will not change. This will lead to economies of scale, where the company earns profit by increasing its capacity or production level.

Value of contribution ( sales - variable cost) also tells a lot about the financial position. A company may have a high contribution margin and low profit or loss. This is because of the fixed costs, that means that company is not able to cover its fixed cost. The fixed cost cannot be changed therefore there is always a scope to increase the production as well contribution till it is at least equal to fixed cost, so as not to run in losses.