ACC 650 week 2 discussion 1 answer to Professor

Hello, Sir and Class

Through CVP analysis, businesses can determine the break-even point and, as a result, be in a better position to predict possible profits or losses that can be made for a given level of activity. It will, for example, be possible to tell whether the existing production capacity for a specific good will lead to a profit or a loss based on an analysis of both the fixed and variable costs that are likely to be incurred. For each level of activity, the firm will, therefore, be able to accurately calculate costs and profits, which leads to more informed decision-making. The speed with which a company can respond to changes in its business environment that can reduce or increase demand is also improved by CVP analysis, as it is easier to calculate expected costs and profits for each option (Jurayevna et al., 2021). In a retail company such as Walmart, CVP analysis can aid in determining whether fixed costs will be covered in an existing or new location based on projections of sales likely to be made. While variable costs can be controlled by changing the volume of stock held and sold, fixed costs will be incurred irrespective of changes in activity. Therefore, a company must ensure that fixed costs are always covered in each location, protecting its overall profitability (Asih & Kuan, 2021). CVP analysis can aid in determining the level of activity or inventory that can cover both fixed and variable costs and, as a result, enable the company to select new locations more effectively and evaluate the performance of existing ones. For an area to be truly profitable, it should cover its fixed and variable costs and break even. The business can also monitor operations more effectively by determining how changes in sales volume can impact costs and profitability.

References

Asih, H. M., & Kuan, C. E. (2021). Cost-volume-profit analysis for uncertain capacity planning: A case study paper. In Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management Surakarta, Indonesia.

Jurayevna, T. M., Abbasovich, K. A., Kadirovich, R. N., Keldiyorovich, O. I., & Yashnarovna, I. M. (2021). Improving the CVP-Analysis as a Tool for Management Decision-Making. Turkish Online Journal of Qualitative Inquiry, 12(8).

Beena Shaji

REPLYDDDavid Durenreplied toBeena ShajiFeb 16, 2024, 11:36 AMReadBeena, When we look at variable cost, what happens to the unit fixed cost incurred if the activity level increases?REPLYBSBeena Shaji replied to David DurenFeb 18, 2024, 5:33 PMHello Sir, With higher activity levels, the unit fixed cost usually reduces. Fixed costs depend not on the production or activity level but on the operations, such as rent, wages, and insurance. Such costs, however, are separate from the number of units produced. On the other hand, increasing production or activity quantities causes the fixed costs to be spread over more units, and as a result, the fixed cost per unit decreases (Mostafa et al., 2020). Consider a manufacturing firm that pays $10,000 per month as rent is an example. If the company generates 1,000 units monthly, the fixed cost is $10 per unit ($10000/1,000 units). If the number of units produced in a month is increased to 2,000, then the fixed cost per unit is reduced by half ($5/$10,000 units). In other words, this is referred to as the economies of scale. In the process of business expansion that entails an increase in production and activity levels, there can be a lower average fixed cost per unit as the fixed costs can be spread over a more significant number of units. This, in turn, enables an increase in profitability with a decrease in the cost per unit with the rising production. Changes in the activity level within the relevant range do not influence the total fixed cost, irrespective of the decreasing fixed cost per unit with increasing activity levels. Thus, the total fixed cost becomes constant even if the activity level changes. Primarily, fixed cost implies a business expense that is not subject to change, even with an increase or decrease in the number of units produced or sold and services sold (Mostafa et al., 2020). The application of this concept is evident in making business decisions whereby variable costs and avoidable fixed costs influence the decisions, such as whether to close or continue operating the business. ReferencesMostafa, M. H., Aleem, S. H. A., Ali, S. G., Ali, Z. M., & Abdelaziz, A. Y. (2020). Techno-economic assessment of energy storage systems using annualized life cycle cost of storage (LCCOS) and levelized cost of energy (LCOE) metrics. Journal of Energy Storage, 29, 101345.REPLY