CostVolumeProfit Analysis Essay
CostVolumeProfit (“CVP”) analysis is essential for any company to be able to determine breakeven points, and determining short term decisions. Arguably, for small businesses, nothing could be more important, as CVP provides the minimum volume of a product needed to sell in order to experience neither a gain nor loss. For entrepreneurs it is important to be effective and efficient when utilizing CVP accounting processes. This provides the framework for analyzing CVP’s importance to entrepreneurs.
Defined, costvolumeprofit analysis is “the study of the effects of changes in cost and volume on profits” (Kimmel, 2011). CVP is critical in profit planning, determining selling prices, and …show more content…
Although breakeven and contribution margin are effective in evaluating sales targets, they should not be used on a standalone basis. It is important to consider elasticity of demand to determine the price of a good or service and the resulting increase or decrease in sells. In conjunction with CVP, it provides a powerful tool to help entrepreneurs estimate the margin of safety associated with the pricing of a product. Entrepreneurs should also consider whether or not their product has a competitive advantage and can command a higher price or if customers will object to a price hike by switching to a substitute good.
From a theoretical standpoint costvolumeprofit is helpful to entrepreneurs’ in evaluating the company’s profits. However, in real world applications, sales and expenses do not always follow a linear trajectory. Nor are costs always clearly defined as fixed or variable. For instance, rent on a warehouse

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6835 Words  28 Pages2008 CHAPTER 7: COSTVOLUMEPROFIT ANALYSIS QUESTIONS 71 The underlying relationship in costvolumeprofit analysis is that costs, revenues, and profits all change in a predictable way as the volume of activity changes. 72 It is more practical to find the breakeven point in sales dollars for companies having thousands of individual items. Finding the breakeven point for each item would be laborious and meaningless. 73 The contribution margin ratio is: price  variable costs price The contribution…

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835 Words  3 Pagesneed to be tested. The first scenario has the $170 selling price and fixed costs of $20 million. Using these inputs, the first step is to calculate the estimated profit under each scenario. Demand Price VC FC Profit Probability 150000 170 4500000 20000000 1000000 0.25 250000 180000 170 5400000 20000000 5200000 0.5 2600000 200000 170 6000000 20000000 8000000 0.25 2000000 4850000 Est. Profit The second scenario has fixed costs of $25 million, but a higher selling price of $200. These changes need to…

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11116 Words  45 PagesCHAPTER 8 CostVolumeProfit Analysis ANSWERS TO REVIEW QUESTIONS 81 a. In the contributionmargin approach, the breakeven point in units is calculated using the following formula: Breakeven point = fixed expenses unit contribution margin b. In the equation approach, the following profit equation is used: sales volume ⎞ ⎛ unit variable sales volume ⎞ ⎛ unit fixed ⎜ ⎟ −⎜ ⎟ − ⎜ sales price × ⎟ ⎜ expense × ⎟ expenses = 0 in units ⎠ ⎝ in units ⎠ ⎝ This equation is solved for the sales volume in units…

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695 Words  3 PagesCostVolume Profit Analysis CostVolumeProfit (“CVP”) analysis is essential for any company to be able to determine breakeven points, and determining short term decisions. Arguably, for small businesses, nothing could be more important, as CVP provides the minimum volume of a product needed to sell in order to experience neither a gain nor loss. For entrepreneurs it is important to be effective and efficient when utilizing CVP accounting processes. This provides the framework…
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