¶ … CVP Analysis in Making Informed Decisions:

Managerial accounting is basically about making informed business decisions and incorporates various tools and approaches. One of the most powerful techniques available for managers to crunch numbers, obtain a thorough understanding of a situation, and conduct a what-if evaluation is Cost-Volume-Profit (CVP) analysis. The foundation to a strong and successful business venture is a clear understanding of the financial effect that most basic decisions may have. Cost-Volume-Profit (CVP) analysis helps in answering some of the basic questions regarding business operations. This is primarily because it is a means of evaluating the relationship between the business fixed and variable costs, volume, and profits. Generally, CVP analysis provides three major tools i.e. contribution margin analysis, breakeven analysis, and operating leverage.

For an entrepreneur starting a business, CVP analysis is a helpful tool for making informed business decisions. The individual can use this tool to make informed business decisions through determining the breakeven point, which is the volume of sales that are needed to at least cater for all business costs. The breakeven point is determined after determining business variable and overall fixed costs ("Business Decisions," 2012). The breakeven point helps in making informed business decisions through its use to evaluate the impact of increasing or decreasing the role of fixed costs in the operating structure of the business. Through this analysis, a business usually can select between a high level of fixed assets and a lower level of fixed assets. The business generates less growth in profits as sales increase and less risk of loss as business sales decrease when there is a lower level of operating leverage. This implies that the greater the use of operating leverage; the larger the rise in profits as sales increase and the more the increase in loss as sales decline.

Reference:

"Business Decisions and Your Finances: Cost/Volume/Profit Analysis." (2012, May 24).

Business Owner's Toolkit. Retrieved February 7, 2014, from http://www.bizfilings.com/toolkit/sbg/finance/your-financial-position/contribution-margins-analysis.aspx