Assignment 1: Discussion—Importance of CVP Analysis Mickelle Bride, the CEO of H
ID: 2587803 • Letter: A
Question
Assignment 1: Discussion—Importance of CVP Analysis Mickelle Bride, the CEO of Harmony Organ, was very excited about the new methods of looking at costs you showed her previously (fixed cost, variable cost, and semi-variable cost, the importance of cost, visual fit, high-low, and least-squares regression.) Due to her enthusiasm, you have decided to introduce her to some additional tools she may be able to use in her organization. Discuss the concepts of a break-even (BE) point and CVP analysis and why they are important in business. Give appropriate examples to support your views.
Explanation / Answer
CVP Cost-volume profit (CVP) analysis is based upon determining the breakeven point of cost and volume of goods and can be useful for managers making short-term economic decisions. Cost-volume profit analysis makes several assumptions in order to be relevant including that the sales price, fixed costs and variable cost per unit are constant. Running this analysis involves using several equations using price, cost and other variables and plotting them out on an economic graph. Formulla Sales price x units sold = all variable cost + all fixed cost + deisred profit BEP - BEP is the point ib units or value terms where company is able to achive his its fixed cost . It is calculated by dividing fixed cost by contrubuition margin per unit Formulla Fixed cost / contrubution per unit Contrubution = sales per unit less variable cost per unit BEP is useful for determining the level of units or value to achive no profit / no loss zone CVP is useful to determine desired profitability level Example sales per unit 100 V cost 60 Contrubution 40 Fixed cost 500000 BEP Units 12500 CVP --- sales 100 v csot 60 contrubution 40 fixed cost 500000 profit rew 100000 total 600000 CVP level 15000