CVP ANALYSIS

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CVP analysis tells more about the information that is derived from the break even analysis. An important part of the CVP is where the total sales are equal to the total production costs of the goods produced. At this point, the company does not receive any profit or loss and this is said to be the break-even point CITATION Den12 l 1033 (Caplan, 2012). The break-even point can be used as the results that CVP makes use of. CVP uses the same analysis as the break-even analysis. There are some assumptions that are used when a CVP analysis is carried out. The assumptions are;

The behaviour of the cost and revenues are constant throughout the entire time.

Costs are either fixed or variable.

Costs are not affected by anything else other than changes in activity.

All goods are sold at the end of the trading period.

When a company deals with more than one type of goods or services, total sales will be in proportion to all the goods.

The various instruments that are used in a CVP analysis include total fixed costs, the price per unit of the goods, the variable cost of one unit and the level of activity in the company. Cost-volume-profit (CVP) analysis measures the changes in profit in relation to changes in price, costs and volume of sales CITATION Ass14 l 1033 (Association of Certified Chartered Accountants, 2014). It is important to perform the CVP analysis because it gives more insight to the entrepreneur on what works and what does not work.

An entrepreneur would find the CVP analysis in planning for the future volumes of activity. He would understand more on the issue of what products to produce. The information is based on the goods that are produced at the minimum costs and yet give the maximum profits. The entrepreneur could use the CVP analysis to plan how the expansion will take place in terms of the goods that will be produced CITATION Den12 l 1033 (Caplan, 2012).

The CVP will enable the entrepreneur to understand the amount of sales that is required to make the targeted profit. This will ensure that he does sell fewer goods than what is needed to make profits CITATION Ass14 l 1033 (Association of Certified Chartered Accountants, 2014). This will help in planning the cost of production and marketing of the goods or service. At this point, the entrepreneur will decide whether they will concentrate on volume sales or price sales. The decision is whether they will be making profit by the amount of goods they sell or the profit they target profits by the price of one unit.

The CVP will help the entrepreneur to understand the amount of revenue that is required to avoid making losses in the company. This will help him to plan for the price of the good and any other methods that he can use to increase his revenue. This may require that he generates some other source of income. The entrepreneur uses the CVP analysis to decide on whether to increase fixed costs. This will enable him to increase the amount of goods for sales and in turn increases the revenue obtained. The entrepreneur will be able to determine whether the fixed costs are dangerous for the company. Fixed costs are said to be dangerous for the company if they expose the company to a huge level of risk CITATION Ass14 l 1033 (Association of Certified Chartered Accountants, 2014).

In conclusion, it is important that the entrepreneur understands and knows how to prepare the CVP analysis for his business ton thrive.

References

BIBLIOGRAPHY Association of Certified Chartered Accountants. (2014, March 8). Cost-Volume-Profit Analysis. Retrieved July 5, 2014, from ACCA: http://www.accaglobal.com/vn/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f5/technical-articles/CVP-analysis.html

Caplan, D. (2012, January 2). Management Accounting: Concepts and Techniques. Retrieved July 5, 2014, from Oregon State University: http://classes.bus.oregonstate.edu/spring-07/ba422/Management%20Accounting%20Chapter%207.htm