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Cost Volume Profit Essay

1261 words - 6 pages

Annals of the University of Petroşani, Economics, 9(3), 2009, 103-106

103

USING COST-VOLUME-PROFIT ANALYSIS IN DECISION MAKING
GABRIELA BUŞAN, IONELA-CLAUDIA DINA *
ABSTRACT: The cost-volume-profit study the manner how evolve the total revenues, the total costs and operating profit, as changes occur in volume production, sale price, the unit variable cost and / or fixed costs of a product. Managers use this analysis to answer different questions like: How will incomes and costs be affected if we still sell 1.000 units? But if you expand or reduce selling prices? If we expand our business in foreign markets? KEY WORDS: cost-volume-profit, marginal contribution, break-even, the ...view middle of the document...

D., „Constantin Brâncuşi” University of Tg.-Jiu, Romania, gabriela_busan@yahoo.com Assist.Prof., Ph.D. Student, „Constantin Brâncuşi” University of Tg.-Jiu, Romania, dina.claudia@yahoo.com

104

Buşan, G.; Dina, C.I.

selling price. The break-even is the amount of production sold for that total revenues equal total costs. This indicator tells managers how much the minimum production must sell for no loss. In economic theory and in practice has imposed the cost-volume-profit analysis and as the critical point or threshold of profitability. This type of analysis is a very effective tool in risk analysis, since break-even can be defined as a measure of flexibility and enterprise in relation to fluctuations in its business. The result of the company is subject to unforeseen events that accompany work in all areas. The concept of "risk" is most often substituted by "flexibility". Regardless of economic or financial capacities of predominantly assigned, flexibility can be defined by the ability of business to adapt and to respond effectively to environmental changes. The break-even is the point where incomes from operations cover the entire amount of operating expenses, operating result was nil. It represents the minimum level at which the company must work in order not to record a negative result (loss). The work undertaken by the company above that level evolve a positive result (profit). By several criteria, determining the break-even may be in physical or value units, and the level of a product or group of products or the whole of the work. The methodology for analysis of operational critical point in the case of singleproductive enterprises or when we refer to a single product (product group). Implicit assumptions underlying the analysis are: can not be changed the price to buy production factors, can not influence the price of goods manufactured and sold, fixed costs do not vary over time, the expenditure variables are proportional to the level of activity Therefore, the only lever that can be driven by the enterprise to mitigate the effects of operating risk, to increase profitability, remains the level of activity. In order to determine the break even it uses three methods: method of equation, the marginal contribution method and graphical method. The equation method involves expression of the results Account as the following equation: (PV * Q) – (CVU * Q) – CF = PE where: PV - sale price Q - quantity of product units manufactured and sold CVU - unit variable cost CF - fixed costs PE - operating profit This equation gives the most general way to address/approach the costvolume-profit analysis. The marginal contribution method first involves reformulating the first method as: (PV * Q) – (CVU * Q) – CF = PE (PV - CVU )* Q = CF + PE (4) (5) (3)

Using Cost-Volume-Profit Analysis in Decision Making CMU * Q = CF + PE

105 (6) (7)

Q=
where: CMU – unit marginal contribution,

CF + PE CM U

CMU = PV - CVU

(8)

Considering that...

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