TIME WARP DECISIONS

Time Warp using CVP analysis



Time Warp using CVP analysis

Introduction

In an expanding market, managers take advantage of fixed costs to generate profitable growth since additional customers do not add much additional costs. In this case, a cost structure dominated by fixed costs is a smart managerial decision. The traditional approach to profitability analysis, which considers only unit-level activity cost drivers, is identified as cost-volume-profit (CVP) analysis. It is a technique used to examine the relationships among the total volume of an independent variable, total costs, total revenues, and profits for a time period (typically a quarter or year). With CVP analysis, volume refers to a single unit-level activity cost driver, such as unit sales, that is assumed to correlate with changes in revenues, costs, and profits. Cost-volume-profit analysis is useful in the early stages of planning because it provides an easily understood framework for discussing planning issues and organizing relevant data (Bragg, 2001). This paper will explore how time warp decisions are executed using the cost-volume-profit models elaborated in earlier modules.

Significance of CVP analysis

CVP analysis is widely used by for-profit as well as not-for-profit organizations. It is equally applicable to service, merchandising, and manufacturing firms. In for-profit organizations, CVP analysis is used to answer such questions as these: How many photocopies must the local Kinko's produce to earn a profit of $80,000? At what dollar sales volume will Burger King's total revenues and total costs be equal? What profit will General Electric earn at an annual sales volume of $30 billion? What will happen to the profit of Duff's Smorgasbord if there is a 20 percent increase in the cost of food and a 10 percent increase in the selling price of meals?

Break Even Point

The break-even point occurs at the unit or dollar sales volume ...