Cost-Volume-Profit analysis is also known as a break-even analysis. Conducting a CVP can help electrix inc. to decide whether to invest in the SUV technology that will alter the structure of their costs since this will help determine the effects of such a technology on profitability and sales. Therefore, the company should analyze the benefits and losses that the new SUV is likely to cost. CVP analysis will also help the company understand the relationship between cost, profit, and volume by focusing on how activity volume, pricing costs, and fixed and variable costs interact. Therefore, it gives the company the information needed to make products, market, and price products to make profits for the company.
The formula for analyzing the cost-volume-profit is;
“ Selling price-fixed costs-variable costs=profit,” whereby profit refers to the amount remaining after all the expenses about the SUV have been taken care of. The fixed costs are expenses that remain constant regardless of the SUVs sold and include rent. Variable costs depend on how many SUVs are produced, and the costs are incurred per the SUV produced. For example, when making one SUV, the company will need to bear the cost of one tire while when making 10 SUVs, the cost will increase ten-fold.
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To conduct a CVP analysis, several assumptions about the SUV are made. For example, it is assumed that the selling-price is constant and that the mix of sales remains constant even though many products are manufactured. Besides, it is assumed that regardless of quantity, the cost is linear in that it rises at the same rate and that this cost can be divided accurately into fixed and variable components. For example, if the selling price per SUV is $36,000, and the variable cost per SUV is $10, 000 and fixed expenses are $12,000. Therefore, if the company sells 100 SUVs, the sales will be $ 3,600,000, the variable costs will be $1,000,000, and the fixed costs will be $12,000. From the formula of CVP analysis;
Profit=sales-fixed costs-variable costs.
Profit=$3,000,000-$12,000-$1,000,000. Therefore, profit will be $1,988,000, which is a profit for the company. Therefore, the company should ensure that the calculation of CVP does not at any one point give a loss.
