What Is a Cost-Volume-Profit Analysis?

The Cost-Volume-Profit analysis is mainly focused on calculating the variables by assessing changes in different aspects of business operation. However, this method can also be called What-If in a way that the presenter mentions: we research what changes if a specific variable increases, decreases, or remains unaltered. For instance, the lecturer focuses on the fact that revenues are firmly dependent on modifications in sales and a fixed degree of operating leverage (Jad-Moussa, 2019). In addition, the presenter researched the possibility of sales increasing, resulting in a soar in net income, “if sales go up by 5%, net income is going up by 3.6 times 5%” (Jad-Moussa, 2019, 7:19). In other words, one might claim that What-If analysis explores all ifs of a company either succeeding or going bankrupt.

Therefore, What-If analysis seems beneficial for managers as they can research possible threats to the company beforehand. To be more exact, they might investigate the impact of modifications in sales on the revenues, focusing on the type of prices of a company. For instance, a decrease in deals is likely to harm a business with fixed costs rather than variable ones (Jad-Moussa, 2019). In contrast, a soar in sales has the opposite effect on organizations’ revenues with the before-mentioned type of prices (Jad-Moussa, 2019). On and whole, the What-If method is used to research crucial variables of any business to be able to advance operating strategy beforehand (Jad-Moussa, 2019). In addition, managers might employ Microsoft Excel to make the calculations easier with the usage of the formula If. As a result, this automatic formula allows measuring how variable changes in accordance with modification in others.

Reference

Jad-Moussa, R. (2019). Cost volume profit analysis – Part 3 – Operating leverage – Management accounting. Google Drive. Web.