The Cost-Volume-Profit Analysis

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The cost-volume-profit analysis (CVP) is used to help companies determine breakeven points and pricing for their products. It is a "method of cost accounting 在ased on determining the breakeven point of cost and volume of goods" and is "useful for managers making short-term economic decisions" (Investopedia, 2013). The mechanism of CVP begins with the revenue, so the price point and the volume of units sold (CliffNotes, 2013). A good way to understand the CVP analysis is using a simple income statement example (Choo & Tan, 2011) The example that will be used here is a one-product small company Acme, which makes ball bearings. The cost of producing one ball bearing is six cents. The objective for Acme in using CVP analysis is to determine how many ball bearings it must sell at its normal price in order to breakeven. Suppose its fixed costs are $100,000. If the normal price for a ball bearing is twenty cents that is the variable cost. The contribution is the revenue variable cost, so in this case 14 cents. The breakeven point is 100,000 / 0.14 = 714,286 ball bearings. There are a few different ways that the company can gain competitive advantage using the CVP method and the information that it generates about the business. The first thing the company can learn is with respect to pricing. The company needs to sell 714,286 ball bearings, so it will only produce ball bearings if it thinks that it can sell that many. If the company does not believe that it can sell enough
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