Running head: WEEK 4 LEARNING TEAM REFLECTION 1

Week 4 Learning Team Reflection

ACC/561

March 6, 2016

Cisco Carbajal, Damon Leardini, Rosa Perez, Emelie May & Richard Benson

MONIQUE SMALLING
WEEK 4 LEARNING TEAM REFLECTION 2

Week 4 Learning Team Reflection

It is a known fact many business do not generate revenue within its first years of

operation. In fact, startup cost for most new ventures are typically funded out of pocket or

through loans from lenders and investors. Because a new business in general has not established

a customer base, it cannot be profitable. Nevertheless, the goal of an entrepreneur is to sell

enough goods to generate revenue to offset expenses for the cost of doing business while

recouping their initial investment. However, there are many entrepreneurs who understand

ventures cannot be chosen on instincts alone but rather instincts and analysis.

Cost Volume Profit Analysis

One analysis often relied upon is the Cost-Volume-Profit. The Cost-Volume-Profit

analysis is a tool a business owner may use to reduce their risk within the business. “Cost-

volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a

company’s profits. CVP analysis is important in profit planning. It also is a critical factor in such

management decisions as setting selling prices, determining product mix, and maximizing the

use of production facilities” (Kimmel, 2011).

Cost Volume Profit (CVP) Concepts

Although there are many aspects to cost volume profit, pricing and fixed rates are two examples

which are equally important. CVP analysis provides an overview of the company’s activity and

how they are faring in terms of production. “This includes everything from the costs needed to

produce a product to the amount of the product produced”, (Lewis, 2016). In order to determine

the best pricing for a product, the company needs to identify the product they predict to produce,

the cost to produce product quantity, as well as variable costs. The pricing is vital when it comes

to competing within that market. Ensuring all costs are covered, allows for accurate pricing and

company profitability. Further, fixed costs are essential. These assist the company in confirming
WEEK 4 LEARNING TEAM REFLECTION 3

which costs will remain the same, in spite of activity change. According to Kimmel, Weygandt,

and Kieso (2011), a company wants to have more fixed costs than variable, because more

automation means less direct labor costs.

CVP Benefits to an Entrepreneur

Entrepreneurs need to have a clear understanding of the direction their business is

heading in terms of the financial impact that their decisions may have. CVP analysis can be

helpful to an entrepreneur starting a new business as the analysis derived provides perspective to

make quick economic decisions and provides insight into the current and future performances.

CVP can help answer many questions regarding business operations like what product or service

is more profitable, what to do if sales decrease, how far to let sales drop before taking action, and

how far to lower prices.

CVP analysis enables the entrepreneur to understand the right set of customers to focus

on while minimizing risk and keeping costs and investments low. CVP analysis focuses on the

changes in costs and profits and how they relate to the changes in sales volume. Moreover, CVP

can also aid an entrepreneur in setting prices and determine what products to invest more in and

which is taking up too many resources to produce. Such information is also critical to tracking

opportunities to reach the breakeven point and if at a sunk investment, how long it will take to

recover losses.

As a business owner or Manager, the goal is to create a strategy to keep the customer

happy but selling enough goods and services for the ongoing fixed costs as well as recover the

initial investment. A CVP analysis statement will help a Manager or Business Owner find the

different variable and fixed costs. Thereafter will show the contribution margin where some

managers will use it because it helps to understand the fixed income percentage amount to apply
WEEK 4 LEARNING TEAM REFLECTION 4

to contribute to the net income. This analysis also helps business owners and managers to know

where the opportunities for improvements and changes are, and it helps to minimize the risk by

keeping cost and investments at a low level of expenses. It is important to recognize when the

breakeven point is and how long it will take to recover from the investment on the business. The

CVP analysis is a great advantage of where the breakeven point starts and how future sales will

help for the success of the business. A good manager or business owner will want to know this

CVP analysis to break or initiate a new strategy that includes new approach and a new way to

sell or produce the products and services.

Cost volume profit analysis covers many concepts which includes safety margin,

contribution margin, target income, and has many benefits to helping entrepreneurs start new

businesses. The analysis is a good tool to help break down costs and determine fixed and

variable costs.
WEEK 4 LEARNING TEAM REFLECTION 5

References

Accounting Explained. (2013). Retrieved from http://accountingexplained.com/managerial/cvp-

analysis/

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business

decision making (4th ed.). NJ: John Wiley & Sons