Question

Comment on the importance of understanding cost-volume-profit analysis and whether CVP is more important to a merchandiser or a manufacturer and why.

Answer 1

introduction :cost volume profit analysis is finanacial tool to understand how the changes are occured in price ,profit cost and volume of production It is also called break even analysis . it determined probable profit at any level of activity.It establishes the relationship between cost of production ,volume of production and the sales .the following basic terms will give the clear understanding of cost -volume profit analysis .

1) contribution

2)profit/volume ratio

3)Break Even Point

4) margin of safety

explanation

1.contribution is the excess of selling price over the variable cost

formula contribution =selling price -variable cost

2.profit/volume ratio establishes the relationship between the contribution to the sales.it is helpful to know the profitability of the business operations .

formula P/V ratio=contribution /sales (or) sales-VC /sales ( or) change in profit / change in sales

it is helpful for determining the desired profit ,desires level of production and sales

3.Break Even Point which breaks the total cost and selling price evenly to show the level of output or sales at which there shall be neither profit nor loss is regarded sa BEP.at this point the income of the firm is exactly equals to its expenditures.

formula

BEP( in sales) =fixed cost /contribution *sales

BEP in units = fixed copst /contribution per unit

4. margin of safety establishes the relationship between actual sales to BEP sales

formula MS=actual sales - BEP sales

key variables used in CVP analysis

variable cost : it changes along with the output  

fixed cost :it dosnt change along with the output.it is constant to the production volume but varies fixed cost per unit

sales is the revenue over the period

profit is the selling price less total cost

profit =sales -(FC+VC)

VC= sales - (FC+Profit)

Fc= sales - (VC+Profit)

A manufacturer or a merchandiser have to understand the CVP analysis ,reasons

1.one have to understand the CVp analysis know the changes in sales, cost ,profit and volume of production

2.one should have to understand the CVP analysis for calculating the desired profit and desired sales volume.

3.It is helpful to take a decision on prodct lines ,that means weather to continue the product or dis continue the product

4.to know , better to make the product or better to buy the product from vendors

5.to observe the significant changes in fixed cost and variable cost

6.it will guides the manufacturers in cost control

disadvantages

1. it is very difficult to present the BEP chart in case of multiple products

2. it is not so easy to classify the semi variable and semi fixed costs

conclusion :cost volume profit analysis is helpful to know the how much volume is to be sold for recovering the total cost . a manufacturer must have an idea on these elements to get success in the competative business world .

thank you