Question

How is CVP Analysis useful in profit planning.

Answer 1

Overview: Cost Volume Profit Analysis (CVP Analysis) refers to a method of analysing how variation in cost and volume of a product can affect a company's profit.

-CVP Analysis is useful in profit planning in the following manner:

• Out of the entire range of products and services offered by a company, it helps the best in determining which ones are utmost beneficial to the company in order to contribute more resources to those products and maximize the overall profits of the company.
• It also helps in tax planning as it can help us in determining taxes of all the products produced by a company and contributing majority of the resources of the entity to the products that provide the maximum tax benefit.
• it can also help in analyzing the present situation of the company and the result of this analysis can help them to understand the different processes and procedures within the organization. By knowing so, the company can do away with the unnecessary operations and it will lead to profit maximisation by eliminating the unnecessary steps.
• It helps managers in the preparation of budgets which involves estimation of costs and revenues at different levels of production within an organization.
• It helps in fixation of sale price as the company can compare their sale price with that of their competitors and arrive at the fixed as well as variable costs of its own operations and in turn, can come up with a selling price which maximizes its profit.