Essay Sample on The Cost, Volume, and Profit

The cost, volume, and profit of a given company relate in a cyclical form such that one factor affects the other. The CVP analysis combines both price and size and analyzes their effect on profit. They could influence the gain both positively and negatively. Generally, it explains how different costs and volumes impact the profit. The CVP analysis helps financial in determining the number of goods and services to supply in the market in the short term. However, in the long term, CVP may not be practical due to fluctuations in the market and the economy.

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Volume

The CVP ratio helps in answering what volume of goods that needs to be sold to optimize profit. In a market economy, an abundant supply of products and services in a market economy implies a decrease in the price of goods. Therefore, in case the company exceeds the demand of the global market share that it has, then it has to reduce the cost of goods to attract more customers. Such a move may result in a decline in profit or even loss. Therefore, in a short time, the company is obliged to act upon the optimal price and volume to maximize profit (Abdullahi et al. 2017).

Prices

The CVP also answers a question concerning the pricing of goods and services in the market. While other factors influence the price, a decline or increase in price may make a profit either to surge or drop. For example, a decrease in the number of goods beyond the average expectation may make a customer consider such a good to be of poor quality; hence they may opt for more expensive goods (Stoenoiu, 2018). Additionally, exceeding the price level may make the product less affordable to the consumer, therefore, resulting in to decrease in sales made. Such a move can cause a decline in the prices of goods and services.

Choices of Product

Finally, the CVP also answers the question of which product is more profitable and which one is less valuable. It also helps decide plants that need to be closed, especially if they are making continuous losses. On the other hand, companies have insight into the product to invest more, especially if they are more profitable. Therefore, in case a product starts making losses, or less profit they start rebranding it, and they can opt to stop producing it.

Importance of CVP

The CVP helps in budgeting and profit planning. If the management is sure of the optimal amount of goods to be produced, it can estimate the cost of production (Lulaj, & Iseni, 2018). Moreover, there are estimates of the profit, and through this, one can decide on the gain to be achieved. This mainly helps when the organization is planning on taking a loan. The CVP relationship analysis also helps in minimizing the chances of incurring losses. Since they can predict an optimal combination of volume and profit, the organization will produce just enough and price it adequately, and through this, the chances of losses are avoided. Finally, it plays a vital role in looking at the progressiveness of a business. If the CVP shows an increase in both volume and profit over time, it means the organization is taking more market share. Hence it is expanding.

References

Abdullahi, S. R., Bello, S., Mukhtar, I. S., & Musa, M. H. (2017). Cost-Volume-Profit Analysis as a Management Tool for Decision Making In Small Business Enterprise Journal Of Business And Management (Iosr-Jbm), 19(2), 40-45.

Lulaj, E., & Iseni, E. (2018). Role of Analysis CVP (Cost-Volume-Profit) as an Important Indicator for Planning and Making Decisions in the Business Environment. European Journal of Economics and Business Studies, 4(2), 99-114.

Stoenoiu, C. E. (2018). Sensitivity of indicators used in cost-volume-profit analysis. In MATEC Web of Conferences (Vol. 184, p. 04003). EDP Sciences.