Uses of CVP Analysis
CVP analysis is an important tool to the management. It is useful to the management in the following areas:
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It helps in planning and forecasting profit at various levels of activity.
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It is useful in preparing flexible budget for cost control purposes.
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It helps the management in the decision-making in the following typical areas:
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Identification of the minimum volume of activity that the enterprise must achieve to avoid incurring loss.
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Identification of the minimum volume of activity that the enterprise must achieve to attain its profit objectives.
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Provision of an estimate of the probable profit or loss at different levels of activity within the range reasonably expected.
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The provision of data on relevant costs for special decisions relating to pricing, keeping or dropping product lines, accepting or rejecting particular orders, make or buy decision, sales mix planning, altering plant layout, channels of distribution specifications, promotional activity, etc.
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Guide in fixation of selling price where the volume has a close relationship with the price level.
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Evaluate the impact of cost factors on profit.
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Where a company is manufacturing more than one product of varying profitability, a change in the profitability of one product will lead to a change in the profitability of the group as a whole. The profit-volume chart may be used to illustrate the effect of changes in product mix by drawing a product profit path or separate profit lines for each of the assumed profit mix for each individual product.
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