Limitations Of Cvp Analysis In Hospitality Industry

Limitations of CVP Analysis:

1) The division of total costs into fixed and variable components becomes difficult to perform.

2) Fixed costs does not remain constant as the output increases beyond a certain limit.

3) Other than Volume, there are many other factors like inflation, efficiency, technology that have an impact on costs.

4) It is not practical to assume that Sales Mix remains constant and this is dependent on demand.

5) We take the assumption that there exists a linear relationship between total costs and total revenue but this remains valid only in a specified range.

6) Our analysis remains valid only in a specified range beyond that it becomes unreliable.

7) As there are many assumptions in CVP analysis. Hence, it needs estimates

This is due to globalization. Free movement of people around the world has exponentially fuelled the hospitality & tourism industry. The industry is highly related to the macroeconomic factors. Changes in global politics, economic stability of the region will affect the industry.

We have seen this affect during the 2008 global financial crisis. During the crisis, many hotels and tourism establishments around the world has faced near bankruptcy. Lack of coherent management strategy is the reason for this. Hospitality industry has high fixed costs.

It takes a lot of investment to build, maintain hotels. Often fixed costs of the hotels are spread across the years. Hotels due to competition do not prioritize to get a return on fixed costs. This causes problems when there is a downward turn in revenue.

Hospitality industry requires CVP analysis to get deeper insights into their costs and plan their sales accordingly.

Cost-volume-profit analysis, is a very effective tool that managers of a business establishment can use. CVP examines the behaviour of total revenue, total costs and results of operations with changes in production volume, selling price, fixed costs or variables costs. They can make a strategic business plan based on this approach and give offers fix off-season rates

It has basically only costs that are directly linked to the output level.

So this method focuses on boosting sales also the emphasis is on analysis of fixed costs and attributing the variable costs on the margin. Basically, the manager’s aim is to maximise margin on variable costs.

Application of cost-volume-profit analysis:

The CVP analysis is significant in hotel management. Taking into account the specifics of the hotel product it is logical on the extent and frequency of application of CVP analysis. With regards to planning, it is evident that determination of the critical/breakeven point in the CVP analysis is frequently overlooked and is generally applied to a set of events. It is clear that one of the most common aspects of this approach often identified with the CVP method itself remains misjudged.

The CVP analysis and Decision Making:

The CVP model analyses how the total revenue, costs and operating profit as the volume, unit variable costs or fixed costs change.

Even the basic CVP Analysis help us in making strategic decisions regarding say the prices, features etc. in a tour