Assessment Description:
Explain the basic components of cost-volume-profit (CVP) analysis. Why is it important to determine a company’s break-even point?
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SOLUTION to ACC 240: Fundamentals of Accounting- Topic 5 DQ 2.
Hello class,
The Cost-Volume-Profit (CVP) analysis is an important financial planning technique that helps a business manage the interrelation between cost, volume, and profit (Lulaj & Iseni, 2019). Some of the key factors used in CVP analysis include sales price, sales volume of product or service, variable cost, fixed cost, and profit (Haller & Bentley, 2022). This kind of analysis enables the managers to determine how alterations in these factors impact on the total financial performance of an organization. A key concept within CVP analysis is the contribution margin, which is the difference between the sales price and the variable cost per unit. The contribution margin shows how much of each sales dollar is available to cover fixed costs and generate profit (Nariswari et al., 2020).
One of the most useful aspects of CVP analysis is calculating the company's break-even point. The break-even point is the level at which the total sales are equal to the total costs hence registering zero profit (Sintha, 2021). Thus, there is a need to identify the break-even point with the following benefits in mind. First, it helps assist the managers in risk analysis by enlightening the minimum levels of sales which are fundamental in avoiding Operating risks; hence, providing invaluable information concerning the amount of financial risk inherent in the company (Sintha, 2020). Furthermore, break-even analysis intensively impacts decisions about pricing strategies, as it demonstrates the relative volume needed to break even with a given price. Moreover, when considering new projects or expansions, break-even analysis helps evaluate the feasibility and potential returns of these investments (Sintha, 2021).
Altogether, CVP analysis and the use of the break-even point are important tools that help to develop a valuable vision to guide the process of strategic management in connection with different aspects of business functioning. I believe that when this information is properly understood, it can enable managers to effectively provide the right price for their products, control costs, and set realistic profit levels for the company's bottom line, all in an effort to make the company more competitive.
References
Bastomi, M., Sudarmiatin, S., & Hermawan, A. (2023). Cost Volume Profit (CVP) Analysis As A Profit Planning Tool At Lay Cang MSMEs. Asian Journal of Management, Entrepreneurship and Social Science, 3(02), 144-160.
Lulaj, E., & Iseni, E. (2019). Role of analysis CVP (Cost-Volume-Profit) as an important indicator for planning and making decisions in the business environment. European Journal of Economics and Business Studies, 4(2). https://doi.org/10.2478/ejes-201-0043
Nariswari, T. N., & Nugraha, N. M. (2020). Profit growth: impact of net profit margin, gross profit margin, and total assets turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), 87-96. https://doi.org/10.20525/ijfbs.v9i4.937
Sintha, L. (2020). Importance of Break-EVEN analysis for the micro, small, and medium enterprises. International Journal of Research-GRANTHAALAYAH, 8(6).