Cost Volume Profit Analysis and it’s Uses for Decision Making

Question: Discuss about the Cost Volume Profit Analysis and its Uses for Decision Making. Answer: Introduction Cost Volume Profit analysis can be understood as a process that is used by organizations in revealing the variations in costs and volume that impacts their net income and operating expenses. CVP works through recognizing differences in distinct relationships like cost of producing and operating goods, the volume of goods sold and profits gathered from sale of products. [1] Through breaking costs into fixed variable, CVP evaluation offers organizations strong perception regarding their produce and services profitability. CVP Based Decision Making CVP analysis can facilitate organizations in determining the contribution margin that can be deemed as the amount remained from sales revenue after deducting all variable expenses. The remaining amount is employed initially for covering fixed costs and the remaining amount is considered as profit. CVP evaluation is relied on determining the breakeven point of volume and cost of goods and might be useful for managers in making short-term managerial decisions. In making such organizational decisions, CVP analysis makes certain assumptions for being relevant.[2] This considers fixed cost, variable cost and the sales price per unit must remain constant. As the CVP analysis is relied on statistical models, decisions can be segmented into probabilities that can facilitate a companys decision making process. Conclusion From analysis of the paper it is gathered that CVP analysis facilitates managers in being capable to answer certain pragmatic questions required in business analysis. This can facilitate managers in making decision regarding future spending and production and the ways it can be developed so that they contribute in success of the company. References Bergo, G, B Lucas, V Sobreiro, M Nagano, "Multiproduct Cost-Volume-Profit Model: A Resource Reallocation Approach for Decision Making.". inJournal of Cost Analysis and Parametrics, 9, 2016, 164-180. Ihemeje, J, "Cost-volume-profit Analysis and Decision Making in the Manufacturing Industries of Nigeria.". inJournal of International Business Research and Marketing, 1, 2015, 8-16.