Relationship of costs and sales volume as it affects profitability

relationship of costs and sales volume as it affects profitability

Companies use cost-volume-profit (CVP) analysis (also called break-even what affects changes in their selling prices, costs, and/or volume will have on profits is a graph that shows the relationships among sales, costs, volume, and profit. Question: We can use the cost-volume-profit (CVP) financial model than to changes in sales volume, although changes in either will significantly affect profit. Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this an. Cost-Volume-Profit Relationships. Cost Behavior The contribution margin is sales revenue minus all variable costs. It may be calculated using dollars or.

Manufacturing industries are not relevant in their decision making process. Most manufacturing industries in Nigeria do not determine the extent to which cost-volumeprofit analysis affect their various decisions.

Manufacturing industries is faced with the problem of how to make use of the available scare resources in order to achieve the objective of profit maximization. To what extent is cost- volume-profit analysis considered relevant in the decision making process of manufacturing industries?

relationship of costs and sales volume as it affects profitability

To what extent does the application of cost-volume profit analysis technique in decision making process enhance managerial efficiency of manufacturing industries?

To what extent does cost-volume-profit analysis affect the various decisions of manufacturing industries? To what extent does each of the identified approaches to cost volume profit analysis is being adopted in manufacturing industries? What is the decision making opportunities of the selected industries based on their reorder level and economic order quantity? Conceptual Framework Adenji states that cost-volume-profit analysis are predetermined costs, target costs or carefully pre planned costs which management endeavors to achieve with a view to establishing or attaining maximum efficiency in the production process.

relationship of costs and sales volume as it affects profitability

According to him, cost-volume-profit analysis is cost plans relating to a single cost unit. Because cost-volumeprofitanalysis purports to be what cost should be, any deviation represents a measure of performance. The predetermined costs are known as cost-volume-profit analysis and the difference between the cost-volume-profit analysis and actual costs are known as a variance.

Drury defines cost-volume-profit analysis as predetermined cost; they are cost that should be marred under efficient operating conditions. The cost volumeprofit analysis may be determined on a number of bases. The main uses of cost-volume-profit analysis are in performance measurement, control, stock valuation and in the establishment of selling prices. Cost-volume-profit analysis is a target cost which should be attained. The buildup of cost-volume-profit analysis is based on sound technical and engineering studies, knowing the production methods and layouts, work studies and work measurement, materials specification and wage and material price projections.

relationship of costs and sales volume as it affects profitability

A cost-volume-profit analysis is not an average of previous costs. They are likely to contain the results of past inefficiencies and mistakes. Furthermore, changes in methods, technology and costs make comparison with the past of doubtful value for control purposes. In order to assist the decision making of manufacturing industries in cost-volume-profit analysis control, the cost-volume profit analysis system must first of all indicate what is attainable by efficient performance and then highlight any area where attainable efficiency is not being achieved.

Cost- volume- profit analysis, according to Glautier et alis the systematic examination of the inter relationship between selling prices, sales and production volume, cost, expenses and profits.

Relationship of Costs & Sales Volume to Profit |

Costvolume-profit analysis will also be employed on making vita and reasonable decision when a firm is faced with managerial problems which have cost volume and profit implications. Costvolume- profit analysis according to Hilton R. The relationship between a products revenue and cost function expressed within the cost-volume-profit analysis are used to evaluate the financial implication of a wide range of strategic and operational decisions.

According to Garrison et al cost-volume-profit analysis is a study of inter-relationship between the following factors: This principle describe cost-volume-profit analysis with curvilinear.

relationship of costs and sales volume as it affects profitability

Cost and revenue curves which thought theoretically sound lack practicability. In other instances, companies look to optimizing short- or long-term profits. In either case, sales volume is a consideration in setting prices and a result of customer response to those prices. Cost-driven Pricing The most common cost-driven pricing tactic is simply cost-plus pricing.

This is where a company determines its cost basis per unit and adds a percentage mark-up to achieve profit objectives.

Relationship of Costs & Sales Volume to Profit

Companies may have higher or lower targeted returns with this approach. With lower mark-up goals, sales volume is generally higher. At higher mark-ups, gross profit margin is higher but demand likely diminishes. Short-term Profit Pricing Certain pricing strategies emphasize short-term profit maximization. Skimming is a strategy where prices are high early when early adopters enter the market and reduced later to attract remaining customers.

relationship of costs and sales volume as it affects profitability

The theory is to get as much revenue from each individual as possible based on their willingness to pay. Over the entirety of a product life cycle, average profit margin is based on how much of the market buys at early, premium prices versus later on. Under normal circumstances, initial volume isn't as high as subsequent volume when prices are reduced. The timing of the reduction affects this variance.