Cost Volume Profit Analysis, Cost, Volume, And Profit

1360 WordsSep 15, 20176 Pages
Introduction Economic models which measure changes in costs and revenues as the volume of activity increase can be complex. However, for the purpose of managerial decision making it is possible to simplify these models in a way that makes them easy to use and therefore more readily useful to the average manager. In this case, cost volume profit analysis is simple, with its assumption of output as the only revenue and cost driver, and linear revenue and cost relationships. it provides minimum values in more complex decision-making cases. Cost volume profit analysis examines the relationships between changes in activity and changes in total sales revenue, cost and profit. It may provide very useful information particularly for a business…show more content…
Moreover, break-even point is useful, simply why firm are making profit. Once the break-even units or break-even revenue is achieved, then the process is openly acceptable. Finally, assumptions, such as sales units are the only cause for cost and revenue changes, linear graph line can be shown when revenue and costs are used, and then single product or service would be analyzed. The strength of CVP lies in the way that it removes many of the complications of the real world in order to provide a sharp focus on the financial impact of decisions. This makes the CVP both simple to apply and easy to understand. In the year of 2001, Yunker, J. (2001) have declared that CVP analysis can not only be used in certain practical decision situations but also provide a conceptual bridge between the accounting and finance literature on CVP analysis under uncertainly and the economic literature on decision-making under uncertainty. This shows that CVP is both simple and simplistic. What’s more, Ojugo, C. (2009) said that knowing the relationship among cost, volume and profit, or CVP is the most powerful tool and easiest way to make a better decision. It shows the volume of sales required to break even and generate profit, the proper price of the menu is related to the cost of sales. Additionally, Eldneburg & Wolcott (2004, p.89) argued that Cost-Volume-Profit analysis provides information such

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