Cost-to-income analysis is a method that analyzes how your business decisions and marketing decisions affect your profits. This design tool analyzes changes in volume, sales mix, sales price, variable costs, fixed expenses, and profits. CVP analysis is often called "break-even" analysis. This is a simple model that assumes sales volume is the primary cost driver. CVP analysis can be used to generate the desired revenue and design
Revenue Planning determines the revenue level required to reach the desired profit level. If a company wants to know the sales volume needed to reach $ 65,000 a year, it can use the CVP analysis. The formula used to obtain the response: units sold = fixed costs + profit / unit selling price – unit variable cost. This gives the company the number of units they want to sell to achieve the desired profit
In the budget planning decisions, managers assume the sales volume and the desired profits are already known. This information can be found through revenue planning. The company now wants to find the value of the desired variable cost or fixed cost to reach the desired profit in the presumed sales volume. Companies use CVP analysis when they have different variables and fixed costs. An example of this is when new equipment is designed to be used in the production of goods. This new equipment can reduce the variable costs of companies, but may increase their fixed costs. The CVP analysis would be used to see how much variable costs are needed to maintain the current profit level. If the variable costs were too high, then the company would not buy the equipment if the profit was reduced.
A real example would be the analysis of social security retirement benefits. Using the data of the United States Social Security Directorate ( www.ssa.gov ), a retired person can develop a "break-even" model to determine when to take care. The question is, if later, after the age of 62 (at the earliest when using the benefits), how long does it take to increase the total amount as a result of future payments? A convenient site provides the answer ( www.social-security-table.com ). For example, a person who chooses to retire at the age of 65 or 70 may use the analysis. The analysis shows that retirees who survived above the 82-year-old have more lifetime benefits (not matching the time value of money) (Blocher, 227).
The company also applied CVP analysis when alternative machines can be purchased. One machine can cost a lot, but it may be less than running. An alternative machine may have a low cost of purchase, but it may have relatively higher operating costs. For example, if a carmaker needs to buy an elevator, an increase will spend more than a second alternative. The company will consider these options by setting sales volumes. The sales volume would help them choose which machine to choose. If you produce large quantities of goods, it may be cheaper for a machine that has lower running costs because it is often used by the machine.
The third example of cost planning changes payouts and commissions. If a company wants to reduce the commission, increasing its employee income. The CVP analysis would be used to figure out how much the commission would have to reduce in order to keep the same profits and sellers ask for payment. Companies operating in different sectors found the CVP model useful in both strategic and long-term planning decisions. Furthermore, an overview of management accounting practices shows that CVP analysis is one of the most widely used methods (Garg et al., 2003). There are a number of constraints to consider when applying break-even analysis. For example, we assume that the total cost and unit of variable cost will not change.
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