Cost Volume Profit (CVP) Analysis Assignment

Introduction:
Cost Volume Profit (CVP) analysis is the method of costing which takes into account the impact
of the changing level of the cost and volume which will generate operating profit. It is also
termed as the break-even analysis and it determines the break-even point for various sales
volume and cost structure that is used by the management in taking short term decisions related
to entity economic condition. This analysis considers various assumptions such as sales price;
fixed costs and variable cost per unit are same (Etges, et al 2016).
The cost volume profit (CVP) analysis is used by the management to determine the sales volume
required to cover the costs and break-even and the management determines the target sales
volume of the entity. The management uses contribution margin for calculating the break-even
point of sales and profit is added to the fixed costs to perform CVP analysis on the targeted
income. The CVP analysis is only reliable when the costs are fixed within the specified
production level. In this analysis all units produced are presumed to be sold and all the fixed
costs should be constant in the cost volume profit analysis (Will Kenton 2019). This also
includes another presumption that the change in the expenses result due to the variation in the
activity level. Further the semi variable expenses should be allocated among the classification of
expenses considering the high-low method or scatter plot (Alnasser, et al 2014).
The CVP analysis also balances the contribution margin of the product and it is the difference
between the total sales and total variable costs of the product. Thus when the management wants
business to be profit generating business then the contribution margin should be more than the
total fixed costs (Kee, R. 2007).

Analysis of the given case:
Similarly in the given case the hotel management wants to open the new budget hotel and
estimates the costs such as variable costs per overnight stay in room as £ 12.50 and also
estimates the monthly maintenance and cleaning costs as £6,500 and other annual overheads at
£3,134,000 and the average annual occupancy rate will be 80% only when the hotel will charge
the competitive rates. Thus management has used the cost volume profit (CVP) analysis to
determine the pricing strategies and the profitability of the hotel so that the group profit can be
enhanced (Woodruff, Jim.2019). Thus the management has to first estimate the number of rooms
which are going to be occupied in a year on an average occupancy rate of 80% which is as
discussed below:
Particulars Value
No. of Rooms 80
No. of days in a year 365
Room days in a year 29200
Occupancy 80%
Occupancy room days in year 23360
From the above analysis it is evident that the 23,360 rooms will be occupied in a year on an
average basis and accordingly the management has to determine the pricing policy so as to
compete with its competitors. Thus on the basis of the estimated variable and fixed costs the

management will determine the target price to achieve the target profit of £760,000 which is as
discussed below:
Particulars Amount(£)
Yearly variable cost 292000
Yearly maintenance and cleaning costs 78000
Other annual overheads 3134000
Total yearly cost 3504000
Target profit 760000
Revenue 4264000
Target price (Total revenue/ Occupancy of room days in
a year) 183
From the above cost volume profit analysis (CVP) it is evident that to achieve the target profit of
£760,000 the hotel management should keep the price of £183 per night as the occupancy rate
but at this price the hotel will not retain as many customers as they are expecting because the
competitor of this hotel entity is offering the same service at £175 per night. Further this pricing
policy will not attract and retain the customers as the competitor is offering same service at
cheaper price (Katsanos, Kelley). Thus it is advisable that the management should first consider
another pricing policy which will provide long term benefit to the entity and the entity will be
able to compete in the market. Therefore the management should determine the alternative prices
for the entity so that they would estimate the point at which the entity will be able to cover all its
cost (Manes, R). Thus the management should determine the minimum price as below: