Friday, February 17, 2012

Use of Cost –Volume-Profit relationship

Cost-Volume-Profit Relationship-
Profit is always a matter of primary concern to management. The volume of sale never remains constant. It fluctuates up and down and income also goes up and down with fluctuations in volume. Profit is actually the result of interplay of different factor like cost, volume and selling price. Effectiveness of a manager depends on his capabilities to make right predictions about future profits. This can
be done when correct relationship existing between cost, volume and profit is known. For this reason, knowledge of relationship among cost, volume and profit is of immense help to the management. This knowledge of cost-volume-profit relationship helps management to find out right solution for such problems as are given below-
i) What should be the volume to be attempted for obtaining a desired profit?
ii) How will the change in selling price affect the profit position of the company?
iii) How will the change of cost affect profit /
iv) What should be the optimum mix of the company ?
Use of Cost –Volume-Profit relationship-
1) This relationship enables management to predict profit over a wide range of volume. This knowledge is very useful in preparing flexible budget.
2) In a lean business season, company has to determine the price of the products very carefully. It becomes necessary sometimes to bring down the price to boost the sale of a product, what impact this reduction in price is going to have no profit position of a company.
3) Analysis of cost-volume-profit relationship helps in decision-making. There are situation when management has to decide whether it should add to its capacity or not with the knowledge of cost-volume- profit analysis, a manager can easily take decision showing in its respect how utilization of available capacity will lead to increase profit.


Post a Comment