Even though CVP analysis is based on specific data and requires tremendous attention to detail, the best that it can do is provide approximate answers to questions, rather than ones that are exact. It answers hypothetical questions better than it provides actual answers for solving problems. It leaves the business manager to decide how to act on the CVP analysis data he has at hand.
For this reason, the manager has to exercise extreme caution when making decisions about changes to business operations and finance. Judgments have to be made after careful investigation and deliberation — and not just be based solely on statistics. Investigation may involve, for instance, interviewing employees and carefully observing their daily activities, as opposed to simply treating them as part of a statistical model. Jared Lewis is a professor of history, philosophy and the humanities.
He has taught various courses in these fields since A former licensed financial adviser, he now works as a writer and has published numerous articles on education and business. He holds a bachelor's degree in history, a master's degree in theology and has completed doctoral work in American history.
Skip to main content. Decision-Making CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. In other words, the point where sales revenue equals total variable costs plus total fixed costs, and contribution margin equals fixed costs.
Similarly, the fixed costs represent total manufacturing, selling, and administrative fixed costs. In this equation, the variable costs are stated as a percent of sales. This also works in reverse. CVP analysis is also used when a company is trying to determine what level of sales is necessary to reach a specific level of income, also called targeted income.
To calculate the required sales level, the targeted income is added to fixed costs, and the total is divided by the contribution margin ratio to determine required sales dollars, or the total is divided by contribution margin per unit to determine the required sales level in units. Remember that there are additional variable costs incurred every time an additional unit is sold, and these costs reduce the extra revenues when calculating income.
This calculation of targeted income assumes it is being calculated for a division as it ignores income taxes. Many smaller banks will be developing customer profitability analyses for the first time. Regardless of bank size, most banks that currently calculate customer profitability will need to increase the effectiveness of the support for the resulting applications. They will need to do this by incorporating more product information into the analysis and using actual costs and transaction- level behavior in their analyses.
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Customer profitability analysis might result in: A. dropping some customers that are unprofitable. B. lowering price or offering incentives to profitable customers. C. giving incentives to all customers to place orders online. D. All of the above%(1).
In a recent post, I wrote about the importance of improving the accuracy of profitability analysis, by using more appropriate drivers that better reflect the way the target products or customers consumes indirect expenses.
Analyze customer needs and wants, find the target cost, design the product, determine the desired profit. Analyze customer needs and wants, determine the desired profit, design the product, find the target cost. Use the following information for the next THREE questions. Customer profitability analysis might result in. Customer profitability analysis might result in: A. dropping some customers that are unprofitable. B. lowering price or offering incentives to profitable customers. C. giving incentives to all customers to place orders online. D. All of the above.
Customer profitability analysis might result in: A. dropping some customers that are unprofitable. B. lowering price or offering incentives to profitable customers. C. giving incentives to all customers to place orders online. Answer view feedback solution tcunit Products Company has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results appear below: Multiply by 1+markup percentage Question 13 Customer profitability analysis might result in: %(65).