Question

How do companies determine their value chain? At what point(s) does management define the value chain for a product/service? What value does a value chain provide for decision making?

Cost-volume-profit may be one of the most valuable assessment tools available to management. Discuss why CVP is so important and provide a real life example you may have been involved in or find of interest as far as break-even for a product/service.

Answer 1

Value chain is determined by company on product or service level basis by dividing the activities that are involved in the process of providing the service or manufacturing the product.

Management will define the value chain in various sub process of manufacturing by eliminating the cost that do not add any value to the customer when they use their product.

Value chain helps the decision making by identifying the costs that are not adding any value to the end user and also unnecessarily increasing the cost to the company and the customer.

CVP analysis is one of the most powerful tools that can be used in making decisions as it determines when the product start making profit after recovering all the relevant cost that is nothing but break even point. This analysis helps in identifying the costs that are non value adding.