Cost Volume Profit Analysis (CVP) is a cost accounting method that assesses how both volume and costs influence the overall operating income of a company. Even though this method is based on assumptions, it does help managers make critical business decisions. Through the analysis of both sales and the accruing costs, managers can easily predict the break-even point which is useful in making proper economic decisions. The success that Southwest Airlines has experienced over the past years was majorly instigated by its ability to manage operations using CVP analysis. The company primarily uses Cost Volume Profit analysis criteria for flight schedules, fare determination and the overall satisfaction of clients. Despite using only one aircraft, Southwest is considered one of the most efficient airline company in the United States. However, the company has achieved this fete by focusing on cost-saving practices such as operating on point-to-point flights where an aircraft does not spend much time on the airline hubs. In doing so, the company can reduce the costs associated with fuel, and flight hours. With this in mind, the overall variable costs are reduced which ultimately increases the company’s revenues.
The introduction of “bags fly free” program is one major decision that is based on the stipulations of Cost Volume Profit analysis. Even though Southwest Airlines was criticized for adopting this program, it is worth noting that the policy harbors numerous economic benefits. For instance, when other airlines are charging to check bags, Southwest is likely to attract more customers with their baggage free program. With a large client base, the company benefits from customer loyalty which helps to generate profits that ultimately outweigh the incremental revenue gained through the charging of luggage checks. Also, with a “bags fly free” program in place, the company can reduce the costs associated with the time lost in luggage checks at the gate. Therefore, this program helps to reduce the variable costs which as a result helps to boost the final revenues received by the company.
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