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CVP Analysis In Decision Making

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QUESTION 1: PREPARING BREAK-EVEN CHARTS AND CONTRIBUTION ANALYSIS

a. How do managers use CVP analysis to make decisions?
Describe at least FIVE (5) uses of CVP analysis.

Answer:
Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned with the effect of sales volume and product costs on operating profit of a business. It deals with how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more different products.

i. Project planning

Profit planning assists in finding the most profitable combination between selling price, cost and volume, and hence it enables calculations of profit at different sales levels. It assumes that sales volume is the primary cost driver. Therefore, managers need to take measures to increase profits by reducing costs, especially variable costs per unit, which vary with the level of activity. It is an important tool in short-term profit planning in an organization, especially in assessing margin of safety.

ii. Decision making

CVP analysis helps managers understand the relationship between cost, volume and profit; thus, it 's a vital tool in the decision-making process in an organization. CVP analysis influences the decision of managers when it comes to matters such as product selection mix, make or buy decisions, selection of the best channel of distribution, the type of marketing strategy to use, what pricing policy to follow and the best

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