Cost Volume Profit Analysis: Establishing a Decision Model
Ryan Lagano
Professor Van Leer
Accounting 200-010 Honors Paper
Cost Volume Profit Analysis: Establishing a Decision Model
In today’s modern world of businesses and corporations, there is a common goal shared throughout every industry: increase profits. With increases in technology and developing methods, businesses have come far lengths in increasing their profits, or operating income. Controlling costs is the key to a successful operation. Executives and managerial departments are using what they know about costs to create business strategies. By gathering information on market demand and combining it with a marketing strategy that focuses on higher margin products, companies are able to continue and increase profits and survive. The Cost Volume Profit Analysis is the paramount and most cost efficient way of doing so. By understanding the economic consequences of cost structure, contribution margin, and break-even sensitivity, a business can create a decision model to enhance the company’s profitability.
A brief outline is necessary in understanding the Cost Volume Profit analysis (or CVP) and creating a decision model. In a very general outlook, the CVP looks at how fixed, variable, and mixed costs change with changes in sales volume. The main goal is to determine what factors control costs and see how management can use this information to improve planning and control activity. The first step in any CVP analysis is picking an activity base relative to the nature of the company’s operation. For instance, a retail operation may use output while a manufacturing operation may use input as their base. After establishing a base, it is necessary for the company to identify all fixed, variable, and overhead costs. This is not an easy task, as what is to be considered one category of cost may change in a different environment.
The CVP looks at how each of these costs affects the operating income. Each cost has its own behavior when referring to the CVP
Professor Van Leer
Accounting 200-010 Honors Paper
Cost Volume Profit Analysis: Establishing a Decision Model
In today’s modern world of businesses and corporations, there is a common goal shared throughout every industry: increase profits. With increases in technology and developing methods, businesses have come far lengths in increasing their profits, or operating income. Controlling costs is the key to a successful operation. Executives and managerial departments are using what they know about costs to create business strategies. By gathering information on market demand and combining it with a marketing strategy that focuses on higher margin products, companies are able to continue and increase profits and survive. The Cost Volume Profit Analysis is the paramount and most cost efficient way of doing so. By understanding the economic consequences of cost structure, contribution margin, and break-even sensitivity, a business can create a decision model to enhance the company’s profitability.
A brief outline is necessary in understanding the Cost Volume Profit analysis (or CVP) and creating a decision model. In a very general outlook, the CVP looks at how fixed, variable, and mixed costs change with changes in sales volume. The main goal is to determine what factors control costs and see how management can use this information to improve planning and control activity. The first step in any CVP analysis is picking an activity base relative to the nature of the company’s operation. For instance, a retail operation may use output while a manufacturing operation may use input as their base. After establishing a base, it is necessary for the company to identify all fixed, variable, and overhead costs. This is not an easy task, as what is to be considered one category of cost may change in a different environment.
The CVP looks at how each of these costs affects the operating income. Each cost has its own behavior when referring to the CVP