Importance of Cvp

Topics: Costs, Cost, Management accounting Pages: 2 (386 words) Published: April 29, 2010
2. Discuss the importance of applying cost-volume-profit analysis to Obiwan Canopy Company.

The cost-volume-profit (CVP) analysis is the systematic examination of the relationship between selling prices, production volumes, costs, expenses and profits. This analysis provides very useful information for decision-making in the management of Obiwan Canopy Company (OCC) as they can use it to examine changes in profits in response to changes in sales volumes, costs and prices. Firstly, OCC can use CVP analysis in establishing the selling price of their canopy in order to meet the targeted profit. In this case, I found that the lower the selling price, the more canopies will be demanded and sold. However, if the selling price is too low, OCC will find it difficult to achieve the targeted profit as well. Hence, CVP is important for the company in getting an ideal selling price that can maximize the profit.

In addition, CVP analysis can also be used to estimate the volume of sales needed to achieve a targeted level of profit. OCC can therefore, avoid any excesses or shortages in production as they can produce their product based on the estimation figure derived from the CVP analysis.

Besides, the company can also use the CVP analysis to study the impact on profits by changes in fixed costs and variable costs. For example, OCC could use it to decide whether to increase the fixed cost or get to know whether the fixed costs expose the organization to an unacceptable level of risk. Normally, a company might opt to reduce their selling costs in order to get higher profit. However, if the reduction in selling price is more than the reduction in its selling costs, the net profit will be reduced. For example, in alternative two, though the variable cost has been reduced by $50, the company still not able to meet the targeted profit because they have reduced their selling price by $60. Therefore, CVP analysis is important for the company to identify the amount of revenue...
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