The profit-cost-volume analysis is crucial throughout the planning process in any business..
Etges, Calegari, Rhoden and Cortimiglia (2016) prepared the first paper for this topic, and the authors outline the concept, meaning, and relevance of the profit, cost, and volume relationship model. The approach is often employed by the company to find out what profits the firm will achieve when manufacturing expenses have been eliminated. As the manufacturing volume of the goods increases, total production costs decrease. Many organizations are thus trying to ensure that they produce the proper amount of goods at a certain stage to control their expected costs.
Daniel (2012) produced the second article, which emphasizes that the CVP concept has been a kind of process through which a corporation attempts to see whether or not it would be useful to apply new ideas or models. The estimates of profit margins are obtained before the implementation of the proposal in the system. This enables management to simply determine the estimated sorts of expenditures it has to pay to implement a new project. The investors or stakeholders might be persuaded of the new idea’s profitability based on the projections.
Punniyamoorthy (2017) wrote the third article selected and the author tries to emphasize that the CVP approach was not only good for cost management but also helps in the marketing activities that a corporation does. Based on estimates of the normal number of products to be produced at a particular period, marketing strategies are developed accordingly. If the corporation does not want to create additional goods, marketing has been slowed down such that additional orders for that product are not obtained. CVP is thus also utilized to advise marketing strategists.
The profit-cost-volume analysis is crucial throughout the planning process in any business. It provides a quick estimate of the product’s financing and profitability throughout manufacturing. Determining the breakeven point would be crucial in this situation. It is very important for budgeting and profit planning. If a firm like Nutri Gain wants to create a new breakfast bar, for example. The product growth group will compute the break-even threshold during the first development phase to determine if it is worthwhile to continue investing in a new bar. The following are some examples of estimated values:
$1.00 is the variable cost (per bar produced)
$4,000 in fixed expenses (for the month)
$2.00 is the selling price (per bar)
Breakeven point = Fixed Expenses /((Sales price per unit) – (Variable costs per unit))
= $4,000/$(2.00 – 1.00)
= 4,000 units
This indicates that the firm has to sell 4,000 bars every month to break even.
Kristensen (2020) was the author of the first article considered for this study. The author emphasized the many advantages of utilizing variable costing to control the operating expenses of manufacturing units in today’s industries. Many businesses can comprehend the difficulties in their systems as well as the best techniques they can use to manage them due to the notion of variable costing. Many businesses have begun to use lean operating processes to reduce costs and enhance profit margins on each product. Furthermore, some businesses have utilized variable costing to assess whether new technologies may be incorporated to provide customers with competitive pricing.
Novak et al., (2017) were the authors of the second paper considered for this discussion. The major goal of the study was to determine how overhead expenditures behave and how probable they are to affect the company’s profits. If a corporation is unable to anticipate, calculate, and control overhead expenses, it will almost certainly lose money at some point. The profit margins which are retained should involve a thorough examination of the potential overhead expenditures, and also how they could behave in the future. The writers provide a thorough description of the many equations that management might use to get the greatest outcomes.
Petr et al., (2016) wrote the third essay that was selected. The writers point out that managing various expenses has been one of the most important and difficult aspects for managers in today’s firms. If the management is unable to produce accurate financial and calculating estimates, it may result in a crisis that affects not just the firm but also the business as a whole. To establish the different expenses and how they must be controlled at the end of the day, variable costing must be employed. Profit margins must not be affected in any way
The overview of the several articles mostly on the CVP model & variable costing provides a substantial amount of information on why the two concepts are important for any management to know or comprehend. It is often the manager’s responsibility to review proposals and ensure that the project, product, or service will provide the profit margins that the organization anticipated. It might be detrimental for the firm as a whole if the management has no expertise or understanding on this account.
Variable costing assists in categorizing expenses based on their function and behavior in the majority of circumstances. Managers would be able to predict total expenses which would vary whenever the cost of the volume varies more effectively if they utilize the behavior and function. As a result, it was critical for firm executives to address variable costs. For instance, suppose the Nutri Gain firm receives a $200 order for 200 bars. To determine approximately the variable cost, materials cost per unit (15 cents), and labor cost per unit (20cents)
Total Variable Cost = (Total Quantity of Output) x (Variable Cost Cost Per Unit of Output)
= 200 X (0.15 +0.20)
= $ 70.00
Total Variable Cost Total variable expenses will be $70, resulting in a gross profit of $130(200 – 70).
As a result, utilizing the variable costs, profits may be predicted.
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