Cost-Volume-Profit analysis also abbreviated as CVP refers to a model in cost accounting usually very useful when it comes to the making of short run decisions as well as in the provision of elementary instruction. The model is especially important as it allows for the estimation of future costs, revenues and profits, therefore allowing for planning and effective monitoring of operations. The model itself entails examination of changes in profits as a result of changes in the prices, costs and sales volumes. This not only allows for planning on levels of operating activity to be used in future, but also helps in providing information on products to be emphasized on, revenues required to avoid making losses, budgets for discretionary expenditures that may arise, whether fixed costs need to be increased, the volumes of sales that would enable the organization realize its target profit margins as well as whether or not the fixed costs currently being utilized expose the organization to a level of risk that may be unacceptable (“Cost Volume Profit Analysis,” n.d).
CVP can be used for the tablet simulation in order to determine the relationship between volumes of sales and the profits, as well as the costs involved in the making of each model. For instance, making the X6 costs less than making an X5 by 27,674,418, and yet the profit differences are just 6,411458, a meager profit difference, considering the cost and volumes of sales for the two products. The best product to concentrate on therefore based on Cost-Volume-Profit analysis would therefore be X6 tablets, as they cost less to produce, require lesser sales volumes to create the target profit margins, making them the ideal product out of the three.
Utilizing this information when it comes to the break even analysis definitely helps, as it means that concentrating on the production of X6 will allow for an earlier break even point, due to the fact that it requires less costs to produce and realizes the required profits at lower volumes of sales a definite advantage if one considers the need to break even. The risk associated with losses is also lower, meaning that breaking even would come sooner if the X6 tablet was the only product being produced by the company. Using CVP in break even analysis is therefore of tremendous value, as it would help the company reduce the number of units required to be sold in order to break even by encouraging adoption of the best and most prudent market strategy.
CVP can help in determining pricing, by allowing for projections on future sales and their relation to pricing. This can therefore help determine whether the best market strategy is to target huge sales volumes, or lower sales volumes with higher profit margins. CVP would also help determine the probability of a new product performing well and therefore the need for more research and development, while at the same time allowing for projections on potential costs.
The other financial technique that might be of help in the simulation data is the differential cost analysis, as this would only focus on the costs that are associated with each product, as well as the differences ion income associated with each product, and a decision on the best course of action made based on this information (Rajasekaran, 2010).
Rajasekaran, V. (2010). Cost Accounting. Pearson.
n.a, (n.d). Cost Volume Profit Analysis. Retrieved from HYPERLINK “http://www.wiley.com/college/sc/eldenburg/ch03.pdf” http://www.wiley.com/college/sc/eldenburg/ch03.pdf
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