Question

Cost-volume-profit analysis (CPV) can be used by management to better understand the relationships between the company’s costs, sales volume, and profit. Cost-volume-profit analysis can be used to evaluate the effects on profit when companies make changes in selling prices, service fees, costs, income-tax rates, and the organization’s mix of products or services. CVP analysis provides management with a comprehensive overview of the effects on revenue and costs, allowing them to implement financial changes and track outcomes. Managers in nonprofit organizations, such as health care, can use CVP analysis to examine the effects of activity and other short-run changes on revenue and costs (Hilton, 2016). My health care organization consists of 15 hospitals and we used CPV analysis to examines the costs of cardiac catheterization. Through this process we were able to determine the costs of each unit performing both diagnostic and interventional cases. We found that the larger facilities with higher volume of cases were able to perform procedures at lower costs. When breaking each procedure down to review costs and revenue; we found that we had discrepancies in billing resulting in lost revenue and that expensive product sitting on shelves was expiring at smaller sites before it could be used. Using CPV helped us identify these opportunities, we were able to reduce costs and increase revenues as a system. We were able to standardize billing processes with the help of our coding department. Supplies are now tracked on a system level allowing for sharing of supplies between facilities in order to avoid expiration and waste of expensive supplies. Thoughts?

Answer 1

CVP analysis summarizes the effects of changes in an organization's volume of activity on its costs, revenue and profit. It can be extended to cover the effects on profit of changes in selling prices, service fees, costs, income tax rates and the organization's mix of products or services. Although the word profit appears in the term, CVP analysis is not confined to profit seeking enterprises. Managers in nonprofit organizations also routinely use CVP analysis to examine the effects of activity and other short-run changes on revenue and costs. Large companies are able to have low per unit cost due to economies of scale. When managers use CVP analysis, the following assumptions are made:

All costs, including manufacturing, administrative and overhead costs can be accurately identified as either fixed or variable.

The selling price per unit is constant.

Changes in activity are the only factors that affect costs.

All units produced all sold.

This helps companies determine their contribution margin, which is the amount remaining from sales revenue after all variable expenses have been deducted. the amount that remains is first used to cover fixed costs and whatever remains afterward is considered profit.

In the given problem, cvp analysis is used to examine the costs of cardiac catheterization. CVP analysis is used to find out the cost per unit of every department. This way we can assess whether each department is providing the expected return. However, further scrutiny helped in finding discrepancies in billing resulting in lost revenue and that expensive product sitting on shelves was expiring at smaller sites before it could be used. Thus, using cvp helped to identify these opportunities, enabling reduction in costs and increasing revenues as a system. Further, billing processes were standardized with the help of the coding department. Supplies can be tracked on a system level allowing for sharing of supplies between facilities in order to avoid expiration and waste of expensive supplies.

Thus, cvp is an extension or even a part of marginal costing. It is an integral part of the profit planning process of a company. It is a regular assessment. A company has to keep checking whether it is reaching the milestones set as per CVP analysis.

In the given case, cvp analysis provide hospital cost information that can be used by decision makers to provide and expand healthcare services, in an effort to increase sustainability and profitability. The use of cost analysis by administrators and regulators will improve the quality of financial information, as well as enhance the efficient use of scarce resources.