Cvp Uses

In: Business and Management

Submitted By creamypuffypoe
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When an organization is set up, whether it may be profit or non-profit organization, organization needs information that can help guide the management in making the right decisions.

How much sales revenue must be achieved in order to cover the expenses?
How much volume level must be achieved to get targeted/net profit?
How will the profits of an organization be affected if the sale prices/service prices change?
How will the profit change if one of the products has been stopped from selling and increase another product sales volume by 30%?

The analytical technique that will answer these questions is called Cost-Volume-Profit analysis. This technique can show the effect of changes in an organization’s volume of activity on its costs, revenue and profit.
CVP analysis can be used not only manufacturing companies but also service businesses such as hotel, hospital and tourism companies etc.

For CVP to be valid, the following must be within the relevant range as the picture is shown above.
The total revenue should be linear
The total expenses should be linear
The sales mix remain constant
In manufacturing organizations, the unit produces during the period should be equal to the units sold.

From the CVP analysis, we can know how much products/services must be sold to reach the target profit or achieve break-even. It is important for an organization to know whether business is profitable or not. From the contribution income statement, managers can recognize the effects on profit from changes in volume. Management can predict what the future will hold if the variables are altered, for example, cost of materials can change. For an organization selling multiple services, with the help of CVP analysis, the management can know the impact on profit of changes in sales volume, prices, variable costs, fixed costs, or the sales mix itself. Management can benefit substantially…...

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