Many entrepreneurs make the mistake of bringing a product or service to the market without fully understanding the total costs involved and the prices they can charge. As a result, they discover they can't sell enough of the product or service to make a profit. One of the most important tools you can use to make better business decisions is the break-even analysis; it enables you to determine with great accuracy whether or not your idea is a profitable one. Best of all, you can use this tool to evaluate every product or service you offer. The break- even point is the starting point for CVP analysis because before a company can earn profits; it must first cover all of its variable and fixed costs. What is CVP?
Cost-volume-profit analysis is a tool that can be utilized by business managers to make better business decisions. Among the tools in a business manager's decision-making arsenal, CVP analysis provides one of the more detailed and objective ways by which a manager can assess and even predict the course of business for the company and its employees. Another major benefit of CVP analysis is that it provides a detailed snapshot of company activity. This includes everything from the costs needed to produce a product to the amount of the product produced. This helps managers determine, very specifically, what the future will hold if variables are altered. For instance, transportation expenses and costs for materials can change. These variable costs can affect the bottom line. CVP analysis allows the manager to plug in variable costs to establish an idea of future performance, within a range of possibilities. This, however, can be a disadvantage to managers who are not detail-oriented and precise with the data they record. Projections based on cost estimates, rather than precise numbers, can result in inaccurate projections. Cost Volume Profit (CVP) Analysis Model says:
(Sales – variable costs) – Fixed costs = Operating income TC = VX + F
* If the sale...
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