Question

What are several applications of cost-volume-profit analysis?

Answer 1

Several applications of cost - volume- profit analysis-

1. To calculate break even point - Break even point is that level of sales, at which there is no profit no loss. It is calculated so as to find out the minimum level of sales required to cover up the costs.

2. To find out which product has highest contribution margin as fixed cost remains same. The product with high contribution margin is given priority in event of limited resources as they will give high amount of profit.

3. To take decisions by using sales and cost mix. Which product uses which material more, where labour hours are allocated more or unusual etc.

4. To decide which fixed costs can be avoided.

5. Helps in calculation of various operating formulas.

6. Overall, cvp analysis helps financial managers and accountants to take decisions regarding profitability of various products.