Lecture 5 Flashcards
How is cost-volume-product (CVP) used by companies
Cost-Volume-Profit (CVP) analysis is used by businesses to understand the relationships between costs, sales volume, and profit
What does CVP help companies determine
CVP helps companies determine how changes in cost and volume affect their profits, helping them plan for profitability
What are the different uses of CVP analysis
Uses of CVP analysis are:
- Profit planning
- Break-even analysis
- Pricing decisions
- Cost structure analysis
- Sensitivity analysis
- Decision-making
How can businesses estimate their profits at various levels of sales with CVP
By analysing how costs and revenues change with different levels of production or sales, businesses can estimate their profits at various levels of sales
What is the break even point
Break even point is where total revenues = total costs
How does CVP help businesses assess the impact of pricing changes on profitability
It helps businesses assess the impact of pricing changes on profitability by analysing the relationship between price, costs, and sales volume
How can CVP analyse price sensitivity
CVP analysis can model how sensitive profits are to changes in costs, volume, or selling prices
How can CVP help with decision making
For decisions like adding or discontinuing products, entering new markets, or making special offers, CVP analysis helps evaluate the financial impact
What are the key assumptions of CVP analysis
Key assumptions of CVP analysis are:
- Linear revenue and costs
- Constant sales price
- Fixed costs remain constant
- Only one product or constant product mix
- No inventory changes
- Constant efficiency
What is used for CVP analysis if multiple products are used
If multiple products are used for CVP analysis a weighted average contribution margin is often used
Contribution margin =
Contribution margin = Sales - Variable Costs
Contribution margin per unit =
Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin ratio =
Contribution margin ratio = Contribution margin per unit / Selling price per unit X 100
Break even point (units) =
Break even point (units) = Total fixed costs / Contribution margin per unit
Break even point (£) =
Break even point (£) = Total fixed costs / Contribution margin ratio
Target profit (units) =
Target profit (units) = (Total fixed cost + Target profit) / Contribution margin per unit
Required sales (£) =
Required sales (£) = (Total fixed costs + Target profit) / Contribution margin ratio
What does CVP analysis help managers assess
CVP analysis helps managers assess how changes in costs, sales volume, and product prices impact profits
How is CVP analysis is applied in various management decision-making contexts
CVP analysis is applied in various management decision-making contexts:
- Break-even analysis
- Pricing decisions
- Profit planning and forecasting
- Cost structure analysis
- Decisions to add or discontinue products
- Make-or-buy decisions
- Target profit planning
- Risk assessment and sensitivity analysis
- Optimization of production and operational efficiency
- Evaluating special orders and promotions
How can CVP analysis help managers decide on the optimal selling price
CVP analysis helps managers decide on the optimal selling price by calculating how changes in price affect profitability
How does CVP help with profit planning
CVP helps in setting realistic profit targets and planning for various scenarios
What can managers plan for if they understand how fixed and variable costs behave
By understanding how fixed and variable costs behave, managers can plan for various production and sales levels to maximize profitability
What does cost structure show
Cost structure shows how changes in production volume will affect the company’s costs and profit margins
How can managers use cost structure analysis
Managers can use cost structure analysis to adjust cost structures to achieve more favourable outcomes
How does CVP help managers to decide to add a new product or discontinue an existing one
When deciding whether to add a new product or discontinue an existing one, managers can use CVP analysis to evaluate the potential profitability of the new or continuing product
What do managers compare for make or buy decisions
With make or buy decisions managers compare the costs of both options, managers can identify the most financially beneficial choice
