How Can CVP Analysis Be Used to Predict Future Costs and Profitability?

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How Can CVP Analysis Be Used to Predict Future Costs and Profitability?

The management of corporate financial assets and especially the assessment of changes in costs per a specific volume of a product is an important step in increasing the corporate profit margins. Therefore, tools for analyzing the current situation and locating possible scenarios for the development of the present cost-related situation are indispensable in the corporate setting (Abdullahi, Bello, Mukhtar, & Musa, 2017). Due to the opportunity for determining change, which the CVP analysis provides, the tool can be utilized to locate the changes in the costvolume dynamics, thus determining the trends that the selected company exhibits currently.

Quite a few companies have been using the CVP analysis as the foundation for their cost management strategy. For instance, Nestlé adopted the specified framework as the method of navigating in the rapidly changing environment of the global market (Navaneetha, Punitha, Rashmi, & Aishwariyaa, 2017).

The incorporation of the described tool into the firms financial management processes seems to have had a generally positive effect since the company has made its future costs more predictable and, therefore, more manageable. Consequently, a rise in profitability ensued, causing Nestlé to regain its place in the global rankings of firms functioning in the soft beverage industry (Navaneetha et al., 2017). The observed shift toward a different method of managing costs allows organizations to retain pliability in their cost and risk management approaches.

Offering a way to identify trends in the cost-volume dynamics, the CVP analysis should be used to determine future expenses and, therefore, estimate the extent to which a specific financial decision may lead to increasing the profit margins. Thus, the integration of the CVP analysis into the environment of an organization should be seen as an important step in managing cost-related issues and building a sustainable cost management strategy.

References

Abdullahi, S. R., Bello, S., Mukhtar, I. S., & Musa, M. H. (2017). Cost-volume-profit analysis as a management tool for decision making in small business enterprise within Bayero University, Kano. IOSR Journal of Business and Management (IOSR-JBM), 19(2), 40-45.

Navaneetha, B., Punitha, K., Rashmi, M. J., & Aishwariyaa, T. S. (2017). An analysis of cost volume profit of Nestlé limited. International Journal of Commerce and Management Research, 3, 66-68.

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