Cost-Volume-Profit (CVP) Analysis: A financial planning tool that can bring the business to success

In order to examine and determine what type of product or service to produce and sell, it is important to consider applying the cost-volume-profit analysis. Before I am not fully aware of this concept but as we dig deeper into the discussion of management accounting subject, this was also tackled as it is also crucial in the operation of the business and a determinant of whether the business is successful or not based on its judgments or decisions. With the discussion about CVP, I learned that it is applied in order to know whether a justification on what product to be manufactured is systematic in relation to its costs, quantity to be sold, and price. It emphasizes and brings all together the financial information of the firm to be able to produce a wise financial decision that will benefit the whole organization. Moreover, its process is that “in order to cover the costs required to make the product and arrive at the target sales volume needed to generate the desired profit, a target profit margin is added to the breakeven sales volume, which is the number of units that need to be sold.” With this strenuous process, the decision-maker could then compare the projections of the product's sales to the target sales volume to see if it is worth manufacturing. This is done in order to avoid wasting the resources, financial or non-financial, and to save for better ideas or projects that will lead the organization to a more profitable manner.

In businesses, taking risks is a difficult decision to make especially for managers or those who are liable for managing the financial state of the whole organization. How they perceive any situation or deal with these risks and uncertainties is crucial to attaining the necessary and target profit margins of the business. It is their obligation to realize the uncertain nature of the future prices, costs and quantities as well as “engage in what-if analysis” where they need to measure the risks using computations, financial basis, and other assumptions. With these concepts, as a future human resource manager, although it is overwhelming due to the amount of information that needed to be absorbed, if it is analyzed well and gives a thorough understanding, then, it will be possible to come up with a wise decision or strategic planning of the best “pricing policy to follow, marketing strategy to use and what type of productive facilities to acquire” to not put all the actions into waste.  

In what-if analysis, included in the CVP, in, my opinion, this is indeed applicable in any business, as it is a useful technique to “examine the impact of underlying assumptions on an answer”. Once every data or information was calculated the managers will be able to come up with decisions that lead directly to the expected profit of the business. It’s like taking risks but before giving decisions, managers need first to answer all the questions on the possible advantages or disadvantages before producing a specific product or service as well as answer the question “will it be able to achieve the target goals or not?”. 

Furthermore, among all the concepts and other financial calculations, the aforementioned sensitivity or what-if analysis has an impact on me although it is a theoretical approach to determining what product to produce, it still allows managers like me in the future to think outside the box and plan wisely the possible impacts of releasing a product or service to the respective market. From my perspective, this analysis allows the business to avoid or minimize complaints and possible problems that the product or service may face. Moreover, identifying these factors may lead the company to balance well their costs or expenditure towards planning the best on what is more worthwhile to invest in or produce.

Hence, with these concepts that I have gained, I hope I will be able to apply this in practical situations when I am at the place where this analysis can be used to somewhat contribute to the growth of the business. Also, to provide wise decisions that can be beneficial for all the stakeholders, employees, and even customers of the organization. Therefore, I conclude that cost-volume-profit analysis is crucial as this can influence production, commercialization, marketing, sales strategies, and other aspects of a brand's operations. The relationship between cost, volume, and profit make up the profit structure of an enterprise.