Cost Volume Profit

Topics: Costs, Variable cost, Management accounting Pages: 1 (369 words) Published: December 9, 2012
Recommended Option
In this report I am going to recommend a business alternative to Digital Ltd, based on a CVP analysis of the three business plans the company has provided. Before going to more detail of the recommended option, I would like to emphasis on the importance of CVP analysis. As CVP is a ‘systematic method of examining the relationship between changes in activity and changes in total revenue, expenses and net profit’ (Drury, 2000), it is a very useful tool for managers to consider cost structure and price setting. When used in computer applications the method helps managers to make decisions based on the results by varying different variables such as selling price, variables cost, etc. This altering of variables to determine the net effect of changing original estimates is called sensitivity analysis. Using the computerized application of CVP, managers can study various combinations of ‘changes in selling price, fixed and variables and assess their effect on profit’ (SWTAFE, 2012). Based on the CVP analysis of the three business plans provided by Digital Ltd, I would like to recommend the Alternative 1 as the most profitable one. This is mainly for three reasons, which are motivation factor, lower fixed cost and higher contribution margin and highest net income of all the three. Motivating is a very important factor in boosting the sales (Businessballs, 2012). Since there is a motivation factor included in Alternative 1, it would be highly beneficial for the company as the forecasted sales increases by 5000 more units than the initial plan. Also in this alternative, fixed costs are cut down by £5000 in comparison with the initial plan and Alternative 2. As lower fixed costs would increase the net income, Alternative 1 brings the highest profit of all three choices. The other reason for choosing Alternative 1 is it has a higher contribution margin compared to Alternative 2, which means if this option is chosen over Alternative 2, the revenue...
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