Question

Read the following scenario and then thoughtfully discuss the questions. In a recent news report, the following statement was made: "A report put out by brokerage house CLSA about Jet Airways said that the fall in ATF (fuel) prices has brought down the load factors (flight occupancy) required for the airlines to break even from 78 percent to 63 percent." The load factor is the percentage of available seats on a flight that are occupied.

What are some important assumptions commonly made in CVP analysis? What significant assumptions and limitations should be considered when using this piece of information? Do these assumptions impose serious limitations on the analysis? Why or why not?

Answer 1

Answer:

i) Cost-volume-profit (CVP) analysis alludes to the investigation of the impacts of changes in costs and volume on the profits of the organization.Cost-Volume-Profit(CVP) analysis depends on the inter-dependency of five parts which are sales cost per unit, volume sold, fixed costs, variable expenses per unit and operating income. It shows the connection between the unit variable cost, fixed cost, selling costs, and quantity of sales.

The important assumptions in Cost-Volume-Profit(CVP) analysis are:

• All expenses or costs would be named variable, fixed, or mixed.
• The selling value or selling price stays unaltered as volume of the item changes .
• Total fixed expense is consistent and constant regardless of the volume changes .
• Volume is the main factor which influences the absolute or total variable expenses .
• In stock levels there will be no huge change .

ii) In the given situation, we ought to consider the beneath referenced important assumption and limitations:

• All factor cost or variable expenses will stay unaltered aside from the expense of fuel. Be that as it may, there are additionally different components influencing the variable cost, for example, financial conditions or economic conditions,  inflation, and resources.
• The selling price stays unaltered per ticket. Anyway it may not occurred constantly in light of the fact that larger part of the organizations for mass requests or orders utilize the discount procedure which may influence the computation of the  contribution margin.
• Total fixed cost stays consistent and constant regardless of the volume changes .
• In stock levels there will be no more extensive change in Jet Airways (should change exist in inventories, it may result to a harder and complex Cost-Volume-Profit(CVP) analysis) .

iii) Yes, these assumptions may impose limitations in a genuine way on the analysis partly. Since the assumptions toward the start of the period fluctuates when the period closes along these lines can cause analysis to can hard to practice certain times since it might result to an absence of exactness or accuracy and precision. To be well-prepared and well-interpreted these assumptions can be valuable device for making of the decisions.