Cost-Volume-Profit (CVP) Analysis: A Discussion on its Usefulness

This discussion board post explores the Cost-Volume-Profit (CVP) analysis, a crucial tool in managerial accounting. The post begins by outlining the unrealistic assumptions inherent in CVP, such as constant inventory levels, fixed variable costs per unit, and the ability to classify all costs as either fixed or variable. Despite these limitations, the discussion highlights the continued utility of CVP analysis due to its simplicity and ability to provide rough estimations for target sales volumes. The responses to the original post further elaborate on the strengths and weaknesses of CVP, emphasizing its use for internal decision-making, its role in providing a base-case projection, and the importance of understanding its limitations to avoid over-reliance. The discussion also touches on the applicability of CVP to different business models, the potential for modifying the analysis with technological aids, and the impact of economies and diseconomies of scale on variable costs. Ultimately, the consensus is that while CVP analysis has shortcomings, it remains a valuable tool for gaining insights into the relationship between cost, volume, and profit, especially when used with caution and combined with other analytical methods.

CVP DISCUSSION
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Reply to Post 1
Am, I agree with the various limitations of CVP analysis which have been indicated by you.
These are primarily derived on account of the unrealistic assumptions. However, despite
these shortcomings I would like to indicate that CVP analysis is a useful tool. This is because
it is quite simple to implement and provides a rough estimation of the target units that the
given organisation would have to sell so as to meet a particular target. Suitable adjustments in
this technique can be made based on the actual behaviour of various costs using various
technological aids (Heisinger,2014).
Also, while the utility of CVP analysis as a standalone tool for analysis may be limited, it can
always be used in association with other quantitative measures and analysis techniques.
Further, in small business where the operations are simple, CVP analysis has significant role
especially if there is one particular product or service which is provided (Petty et. al., 2016).
Further, this analysis is also capable of providing an estimate of the sales volume which must
be achieved to attain the underlying target based on the assumptions such as nature of fixed
costs and variable costs along with product mix (McLaney & Atrill,2014).
References
Heisinger, K.(2014) Essentials of Managerial Accounting 4th ed. London: Cengage Learning.
McLaney, E. and Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin J.D. and Burrow, M.(2016),
Financial Management: Principles and Applications 6th ed. Sydney: Pearson Australia
Reply to Post 2
As you indicated Ran, despite the shortcomings CVP analysis is extensively used in various
business scenarios for decision making by the management. It is not used hy the external
users since they do not have to make decisions about the product costing and pricing. This

has to be carried out by internal users such as managers who tend to rely on CVP analysis
along with other tools so to determine the target sales which the underlying company would
need to be accomplished (Heisinger, 2014). Further, it is noteworthy that CVP analysis as a
model does not some flaws and it is precisely these flaws which lead to it being quite simple
and easy to use. This is one of the major reasons for the vast usage of this model (McLaney,
and Atrill, 2014).
Further, this serves as a useful tool for a base case projection. It is always possible to tweak
the CVP analysis based on the varying assumptions that do not hold true. Also, there are
technological aids which can provide assistance in this regards. The utility of CVP model
should be apparent from the fact that despite its shortcomings it is still being extensively used
by firms for a rough estimation of the target without considering the actual complexities of
the business (Bhimani et. al., 2016).
References
Bhimani, A., Horngren, C.T., Datar, S.M. and Foster, G.(2016), Management and Cost
Accounting, 4th ed. Harlow: Prentice Hall/Financial Times
Heisinger, K.(2014) Essentials of Managerial Accounting 4th ed. London: Cengage Learning.
McLaney, E. & Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited
Reply to Post 3
Moha, I am in complete agreement with the caution that managers need to exhibit when using
CVP analysis on account of the shortcomings and weaknesses involved. In this regards, it is
noteworthy that CVP analysis can be used properly only when the managers understand the
various weaknesses. This is because this will not allow the managers to become over reliant
on the results obtained through CVP. Instead, the CVP analysis would serve as the starting

point and then more sophisticated tools can be used to further modify the target to align with
the stated objectives (McLaney, and Atrill, 2014).
Also, as you have indicated, the utility of CVP for a given organisation should be based on
the underlying parameters related to the business. For instance, a business based on a single
product would have immense utility for CVP analysis. However, a business having a
portfolio of products whose respective sales are seasonal would be less served with CVP
analysis as it would not be useful (Parrino and Kidwell, 2014). Thus, the extent of utility of
CVP as an analysis tool is dependent on the underlying nature of the businesses and the
extent to which the assumptions are fulfilled (Brealey, Myers and Allen, 2014).
References
Brealey, R.A., Myers, S.C. and Allen, F. (2014) Principles of corporate finance. 2nd ed. New
York: McGraw-Hill Inc.
Parrino, R. and Kidwell, D. (2014) ,Fundamentals of Corporate Finance,4th ed., London:
Wiley Publications
McLaney, E. & Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited
Reply to post 4
Safi, I am in agreement with the uses of CVP analysis particularly for determining the
underlying profitability of the various products based on their underlying contribution margin
and sales. Also, CVP analysis provides useful information with regards to inter-relationship
between cost, volume and price of the underlying good. However, one should be cautious
with regards to the limitations of the CVP analysis and must thereby be careful in deriving
interpretations (McLaney, and Atrill, 2014).
Further, some of the assumptions related to CVP analysis seem quite dubious particularly
constant variable cost even though there is an increase in volume. As volume increases, there
would be economies of scale which would be reaped by the business owing to lower unit
variable cost. Further, when the volume increases beyond a certain limit, then there would be

diseconomies of scale which would lead to lower production. The unit variable cost is usually
dependent on the underlying quantity and therefore varies. Similarly, other costs also do not
follow a linear structure and therefore it is pivotal to capture this non-linearity in the analysis
which CVP is not capable of. (Bhimani et. al., 2016).
References
Bhimani, A., Horngren, C.T., Datar, S.M. and Foster, G.(2016), Management and Cost
Accounting, 4th ed. Harlow: Prentice Hall/Financial Times
McLaney, E. & Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited
My reply
I have indicated the various shortcomings associated with CVP analysis. However, despite
these constraints, CVP is a useful tool which is the reason why it is still so prominent in
various businesses. Under an ideal scenario represented by the assumptions, CVP does
indicate a relationship between cost, volume and profits. It is quite possible that the
assumptions under CVP may not be true for a given business. Use CVP as the base, suitable
modification may be carried out in the estimate through the use of various technical aids. The
CVP approach is quite simple to use and thereby quite popular (McLaney, and Atrill, 2014).
As a result, in order to derive profits and rough estimates, CVP analysis is quite frequently
used in various businesses. Further, there are businesses which do not deviate in any
significant manner from the CVP assumptions and hence in such cases the model may be
applied without any modification. Otherwise based on the assumptions that are violated it is
possible to make suitable modifications so as to provide useful estimate to the management
(Brealey, Myers and Allen, 2014). Hence, it would be fair to conclude that the CVP analysis
in isolation does offer immense utility and hence the usage of this tool is likely to continue in
the future.

References
Brealey, R.A., Myers, S.C. and Allen, F. (2014) Principles of corporate finance. 2nd ed. New
York: McGraw-Hill Inc.
McLaney, E. & Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited