Hi Ishan,

This is a very informative summary of CVP analysis and variable costing. I would like to add my
views on the CVP analysis and its importance in managerial accounting.
Several organizations and accounting practitioners utilize cost-volume-profit analysis to make
informed decisions regarding their products or services. The CVP analysis is, therefore, more
important in managerial accounting than in financing accounting. Management accountants
advise business owners and managers on how to make money-saving decisions. Unlike
economic accounting, which aims to paint an economic picture of the company to assess its
financial health, financial accounting focuses more on determining the financial performance of
the company. (Fool, 2015).

Companies can determine their contribution margin by performing a CVP analysis, in which the
remaining amount from sales revenue appears after all variable costs are removed from it. Profit
is defined as any amount remaining after the fixed cost portion is covered. If a company has sales
revenue of $500,000 and variable costs of $300,000, then it has a contribution margin of
$200,000. The contribution margin would be $4 per unit if the company sold 50,000 units in a
given year at a sales price of $10 per unit and a total variable cost of $6 per unit. Using
contribution margins, companies can determine whether they would be more profitable if they
reduced their variable costs or increased product prices. (Fool, 2015).

References

Fool, T. (2015, December 25). What Is CVP, and How Is It Important to Managerial
Accounting? Retrieved from https://www.nasdaq.com/articles/what-cvp-and-how-it-important-
managerial-accounting-2015-12-25