Discussion Forum 2
Student’s Name
Institution
Discussion Forum 2
Cost-Volume-Profit Analysis (CVP)
Cost-volume-profit analysis is a technique used by companies to determine the extent of changes in volume, and cost will affect the companies net income and operating income. There are several assumptions that are made when the concept is used by companies to determine the effects of changes on net income and operational cost. However, the concept keeps fixed prices, sales price, and variables cost constant. This concept thus requires a company to use equations for cost, prices in addition to equations of other variables and then plotting them on a graph (Blocher et al., 2014). The formula used to calculate CVP is as follows, break sale volume= FC/CM, where FC stands for the fixed costs, and CM equals sales minus all variable costs. CVP formula is therefore used by companies and organizations to determine volume sales that can cover breakpoints and costs.
The Purpose of CVP Analysis
CVP is used by companies to calculate contribution margin, which in turn determines the company’s break-even point of sales. This is thus achieved through dividing fixed costs with the ratio of contribution margin to calculate the break-even point. For instance, a business with a fixed cost of $100,000 and a 40% contribution margin must, therefore, earn a revenue of $250,00 so as to break even. The profit of the company can also be added to the CVP analysis based on the desired income. For instance, if the company’s previous budget desire is to earn a profit of $50,00, then total sales can be determined by dividing the total sum of desired profit and fixed costs by 40% contribution margin (Bruggen, 2013). Thus, the company will be able to earn the desired profit.
CPV analysis is, therefore, reliable only if the costs are fixed within a particular product level. Then all units produced are assumed to be sold as well as fixed costs are stable. CVP analysis also makes the assumption changes in expenses happen as a result of activity level changes (Bruggen, 2013). In addition, for CVP to be a reliable tool in company’s then semi-variable expenses have to be split in classification expenses either using scatter plot, high-low method, or statistical regression.
Capital and Analysis of Capital Investment
Analysis of capital investments refers to the budgeting procedures that government agencies and companies use so as to assess the probable profitability of investments. These budgeting procedures access all long-tern investments such as machinery, equipment, and also real estate. The main aim of analysis capital investments is, therefore, to identify better options that can make it possible for government agencies and companies to yield the highest profits after investments. There are various techniques that companies and government agencies can use in capital and analysis of capital investments. Such techniques or approaches include risk-neutral valuation, net-present value analysis risk-return analysis, and discounted cash flow analysis (Cafferky & Wentworth, 2010). Analysis of capital investment is thus a budgeting procedure that requires companies and government agencies to take the risk of investing in long-term investments and investments that will take a long time to pay off.
The Relationship Between the Selected Techniques
Both techniques are used by companies to determine potential profitability. The cost-volume-profit analysis determines how changes in volume and costs affect net income and also the operating income of a company. Analysis of capital investments determines the potential profitability of a company in its long-term projects. However, such techniques are applied differently by companies. The cost-volume-profit analysis determines profits for a company in short-term projects (Cafferky & Wentworth, 2010). Analysis of capital investments determines the profit of a company in long-term projects.
References
Blocher, E. J., Stout, D. E., Juras, p. E. & Smith, S. (2014). Cost Management (8th ed.). A Strategic Emphasis.
Bruggen, A. (2013). Capital rationing for capital budgeting. Capital Budgeting Valuation, 95-109. https://doi.org/10.1002/9781118258422.ch6
Cafferky, M., & Wentworth, J. (2010). Break-even analysis: The definitive guide to cost-volume-Profit analysis. https://doi.org/10.4128/9781606490174