Advantages and Disadvantages of Cost-volume Profit Analysis

628 WordsFeb 2, 20182 Pages
Introduction Business is a very subjective and individualized practice where variables team up to present new and interesting combinations that result in excitement and interest about a product or service that a company or individual may want to sell. For the entrepreneur, break even analysis using cost-volume profit (CVP) equations is a very powerful tool that can help business decision makers gain an understanding of their particular situation. The purpose of this essay is to discuss CVP analysis and relate how an entrepreneur may use this model to better enhance and improve the business itself. Background on CPV CVP analysis deals with how profits and costs change with a change in volume. More specifically, it looks at the effects on profits of changes in such factors as variable costs, fixed costs, selling prices, volume, and mix of products sold. By studying the relationships of costs, sales, and net income, management is better able to cope with many planning decisions. For example, CVP analysis attempts to answer the following questions: (1) What sales volume is required to break even? (2) What sales volume is necessary in order to earn a desired (target) profit? (3) What profit can be expected on a given sales volume? (4) How would changes in selling price, variable costs, fixed costs, and output affect profits? (5) How would a change in the mix of products sold affect the break-even and target volume and profit potential? Advantages and Disadvantages of CVP
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