Question

What do you think about companies with several different products having a more difficult time using CVP analysis

Answer 1

As we know that CVP analysis is very helpful tool in knowing the impact of change in sales volume & impact of change in cost structure on the net operating income. In other words we can say that CVP analysis helps management in determining the break-even point for various sales level.

Thus we can say that most of the corporations uses CVP analysis technique for knowing the positive or negative impact on the net income due to change in sales volume or change in cost combination etc.

But in case of companies having different products then CVP analysis technique becomes more complex because in case of single product we need to calculate contribution margin and its impact due to change the structure of single product only.

In case of different products we will have to calculate combined contribution margin on the basis of weight of product. Fixed costs in case of multiple products are always given combined hence we have to calculate combined contribution margin on the basis of contribution margin of each product.

So we can say that CVP analysis technique is also very useful in case of companies having different products but it becomes more complex in this case, and such complex process of CVP analysis becomes more time consuming and costly for the companies.

Apart from this in case of different products, a minor mistake in calculating contribution margin on the basis of weights of product can lead to bigger negative results for whole company that is why use of CVP analysis required due care. That is why we can say that inspite of various benefits of CVP analysis technique we need to be much careful while using CVP technique in case of companies having various different products.

So management should consider required time, costs and higher chances of errors of using CVP technique in case of companies having different products.