Library Research Assignment (Essay Sample)

Accounting Name: Course: Tutor: Date: Features of Cost-Volume Profit (CVP) Analysis Cost-Profit Analysis is a very powerful tool used by managers to ascertain the interdependence between price, volume, and value in an organization by focusing on the interaction between elements such as product, per unit variable cost, level of activity, mixed products, and total fixed costs (Bhattacharyya, 2011). Through it managers are able to establish the break-even point, which allows them to identify the volume of sales required to cover the total cost. In order for the Cost-Volume Profit to be precise, the costs as well as the resulting revenue must all remain linear all through the production line. In this case, costs are established as either fixed or variable whereby they are affected by changes in activity only. Moreover, in case a product line has two or more items, then the relationship among all items concerned must remain consistent. Significance of the Break-Even Analysis Point to Managers The Break-Even Analysis point is exceptionally useful to business managers in that it establishes the sales needed to generate a profit. In this regard, information about the break-even point is a critical ingredient to managers’ quest for, entering new markets, initiating new product lines or changing prices of products. It, therefore, enables managers to make rational decisions as to either keep up with the same product line or introduce a new product line for the sake of profit optimality. In other words, it allows the executive to discover the volume of sales required for total revenue to equal the total cost. The Break-Even Analysis position can also be utilized in predicting the profits or losses that can be earned at differing activity levels. In most cases, the Break-Even Analysis oversimplifies a large percentage of practical situations, and therefore it should be considered as a rough guide for making decisions. Nevertheless, by means of highlighting the interactions of volume, costs, profit, and revenue, it can offer valuable information to managers particularly regarding short-term decisions. The Break-Even Analysis can be executed purely through calculations or graphical representations by the use of the break-even as well as the profit-volume charts (Weygandt, Kieso, & Kimmel, 2010). For instance, to calculate the break-even point, the manager first needs to ascertain the contribution margin. This particular margin can be used to establish the production costs and compute an appropriate selling price while bearing in mind the variable cost. In this case, the break-even point is computed by division of fixed cost by the entire contribution margin. In the event that the break-even level obtained is outside the acceptable limit, then the manager may consider adjusting prices accordingly. Comparison between Contribution Margin and Fixed Costs Contribution Margin Analysis calculates the ultimate performance of the manager along with activity. Mathematically, contribution margin is equal to the sales subtract variable cost. It usually illustrates the relationship between fixed cost and variable cost; regardless of the specific functions a particular cost item is associated. The contribution margin is a Cost-Volume-Profit analysis, which examines the correlation of profits, costs, expenses, sales, production volume, and selling prices. On the other hand, fixed cost is a periodic cost that often remains less or more unaltered regardless of the sales or output, tax, insurance, depreciation, salaries, interest, rent, and wages. While fixed costs can vary at times, the change can never be, as a result, of production activity. Therefore, the main difference between the contribution margin and fixed cost is based upon production activity. Contribution margin is highly affected by production activity whereas fixed cost is not affected by production activity at all. However, fixed costs and contribution margin are closely related, and are both critical elements of the cost-volume-profit analysis that allows businesses to lay down organizational policies and strategies (Rajasekaran & Lalitha, 2011). An increase in the fixed cost often adds to the overall cost. Finally, this d the decreases the sum of revenue the company obtains from services due to low contribution margin. The decrease in the contribution margin makes the company reduce costs in order to increase profitability and stay competitively active in the marketing front. Use of Contribution Margin in Product Costing The contribution margin analysis is a very powerful decision-making tool about product costing. It allows managers to determine how profitable a given product line is thereby making them channel organizational resources effectively, in order to make informed decisions regarding both investment and pricing of products. It also enables managers to; establish the kind of products to develop or drop, determine areas of direct expertise, ways of effectively competing in the marketing front, budget areas for advertisement, establish areas of bonus and commission rates (Kimmel, Weygandt, & Kieso, 2011). Hence, the contribution margin allows managers to set up prices that will be in accordance with the needs and demands of customers without compromising on product quality. Use of Cost-Volume-Profit to Evaluate Financial Consequences of Alternative Decisions In order for individuals to have a vibrant and thriving business, they ought to have a clear and rational understanding of t...