CVP ANALYSIS AND COMPUTER APPLICATIONS
The output from a CVP model is only as good as the input. The analysis will include assumptions about sales mix, production efficiency, price loads, total fixed costs, variable costs and selling price per unit.
The CVP equation can be used to develop financial planning programs. These programs quickly calculate the effects of changes in price, costs and volume on an organization’s profits. They result such “what- if” questions as:
- How could a 5% increase in the sales price affect operating income?
- If Fast Food Co. increases its advertising budget by Sh1 million, how many hamburgers must it sell to cover the increase in fixed expenses?
- iIf the campus bookstore extends its hours, how much additional revenue must it earn to cover the increased operating expense?
- If variable production costs are reduced by 7%, how many units of product must be sold to earn Sh 200,000 operating profit?