Learn how changes in prices, margins and unit volumes of products or services can affect a company’s ability to generate profits.
The difference between business revenue and costs of operation make up business profits. Sales volumes and the cost of products or services can impact the potential of a business to generate profits. This relationship is explained through cost-volume-profit analysis.
The difference between sales and variable costs or the cost of goods and/or services sold makes up profits. After deducting fixed costs from the gross profit, you are left with income or the net profit. Fixed costs range from rent and interest to insurance and labour costs. They are indirectly related to production of goods and services.
Higher costs lead to lower profits and vice versa. Increasing revenue or lowering costs can increase profits. Improving the efficiency of business operations, reducing the cost of material and cutting on labour can reduce costs. The cuts on costs should not cause a drop in business revenue to increase profits.
If the sales volumes are higher than variable costs, more profits can be generated. Constant sales volume and revenue with reduced costs can increase profits. This course explains the relationship between costs, volumes and profits through cost-volume-profit analysis.
We show how changes in prices, margins and unit volumes of products or services can affect a company’s ability to generate profits. Cost-volume-profit or CVP analysis is a critical tool for financial analysis that helps businesses determine their ability to become profitable.
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