Assignment: Analyzing Profitability and Other Variables

Cost-volume-profit analysis is an extension of break-even analysis. CVP analysis enables managers to understand cost behavior and the effect on profits in response to a wide variety of influences, such as changes in volume, variable and fixed costs, and price. This helps management make appropriate business decisions. For example, CVP analysis helps management identify a break-even point if volume or costs change or determine the volume necessary for a targeted profit level. CVP analysis can also help management develop a pricing strategy by projecting the effects the different price structures will have on costs and profits.

In this assignment, you will examine how you can use CVP analysis to plan and make various business decisions. In addition, you will analyze financial data of Compnet's potential product acquisition (Prime Component) and determine the effects on profit due to variations in its costs and sales price.

Tasks: Part I: Using CVP Analysis for Business Decisions

Respond to the following:

• How will you use CVP analysis to make business decisions at your workplace? Support your answer with examples.

• Using an example from your workplace, distinguish between variable and fixed cost structures. Why might different managers assess the same cost differently?

• How would you use CVP analysis to develop a budget? Elaborate using examples.

• How can the sales department use the CVP tool when analyzing customer profitability?