Cost Volume Profit Analysis
Autor: Jannisthomas • February 12, 2018 • 834 Words (4 Pages) • 654 Views
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Top management could also know the number of units to be sold in order to make profits upon this they decide their strategy and their targets.
The cost benefit analysis shows a snapshot of the company's activities either in sales or costs, so it helps managers to know what the future holds if costs changed and how to handle such crisis.
The cost volume profit analysis may be extremely essential to top management when deciding to accept a bulk sales order or not, so if the breakeven point is at 200 units and they had a order with 400 units but with a discount they can decide whether to accept it or not if it will cover the costs and reach the breakeven point.
The breakeven analysis maybe be benefcial in deciding the price as said before, they can decide the contribution or profit margin per unit they want to cover the fixed costs, so if the product is price inelastic they can increase the price and have more profit per unit or decrease the price if price is price elastic, so they can sell more units and sell more units and reach breakeven point faster.
The main limitation for cost-volume profit analysis is that it works under assumptions that variable cost,fixed cost and price per unit are constant which is not true, moreover it assume that all units produced are sold which is not true as the level of sales is controlled by demand and as well by the stage of the product in the product life cycle.
Moreover some costs are not classified neither fixed costs nor variable costs such as electricity and they are classified as semi-fixed costs and they affect the calculations of breakeven point
At last but not least, cost-volume profit analysis is very important for top management in order to plan for the future of the business upon the costs and revenues of the product as well as the price per unit so it's very helpful to decide the price of product and to control costs.
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