Question

Electrix, Inc. is an electric car manufacturer that is in the third round of production for new, state-of-the-art electric sport utility vehicle (SUV). The accounting department is fairly diverse, and you specifically work in the budgeting and projection area of new products. Due to many changes in the way sales projections are communicated within the corporation, the CFO has asked your team to conduct a cost-volume-profit analysis for the new electric SUV that will hit the market in the upcoming year. Completing multiple sales projections can yield various outcomes.

• Select 1 strategy to use to complete a cost-volume-profit analysis, and provide your reasons for the choice.

Answer 1

Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that varying levels of costs and volume have on operating profit. The cost-volume-profit analysis, also commonly known as break-even analysis, looks to determine the break-even point for different sales volumes and cost structures, which can be useful for managers making short-term economic decisions.

The cost-volume-profit analysis makes several assumptions, including that the sales price, fixed costs, and variable cost per unit are constant.

CVP breakeven sales = Fixed costs / contribution margin

Where, contribution = Sales – Variable costs

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Now, the most common strategy that can be employed for CVP analysis can be Cost Management (Control & Reduction). This would determine both the breakeven point and the target income. The CVP analysis would yield one of two conclusions:

First, it might say that lowering the price (due to reduced costs) is a good idea and profits would increase.

Second, it could determine that selling more SUVs at a lower price would never yield a profit, even with the increased sales.

Then the company could decide either to leave the price the same, or eventually raise the price in order to fulfill its motive. Although raising the price may be the best option, there are no real guarantees in the business world, and so it may or may not work.

The reason to opt for this strategy is that – cost is the primary factor which can be controlled, whether variable or fixed. A producer can always monitor its costs and accordingly devise its marketing strategies and the target price for its product.