Cost-Volume-Profit Analysis Essay

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Cost-Volume Profit Analysis Cost-Volume-Profit (“CVP”) analysis is essential for any company to be able to determine break-even 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, cost-volume-profit 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…
Doing so will help minimize the risk of failure and profit loss. Having adequate data to properly reflect fixed and variable costs allows entrepreneurs to determine whether a product will help maximize profit. Although elementary in terms of its mechanics, CVP is an important tool that many entrepreneurs utilize to make sound business decisions is break-even analysis. Break-even analysis enables an entrepreneur to determine with great accuracy whether or not his/her idea is profitable. Although break-even and contribution margin are effective in evaluating sales targets, they should not be used on a stand-alone 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 cost-volume-profit 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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