【A.16.00】What to be cautious about when dealing with the analysis?

Briefing Note
Reading comprehension is a skill that empowers lifelong learning intelligence for a better self.
Cost-volume-profit (CVP) analysis is a useful tool..

✅ ..for analysing the relationship between costs, volume, and profit.

✅ However, it does have certain limitations that should be considered, including:

🚩 Assumptions

🚩 Single product focus

🚩 Cost classification

🚩 Limited scope

🚩 Ignoring non-financial factors



✅ CVP analysis relies on a number of assumptions, such as fixed costs and linear relationships between costs and volume, which may not always hold true in real-world situations.

✅ Deviations from these assumptions can lead to inaccurate results.


Single product focus..

✅ CVP analysis is typically used to analyze the profitability of a single product or service.

✅ It may not be as useful in situations where a company produces multiple products with different cost and revenue structures.


Cost classification..

✅ CVP analysis assumes that costs can be easily classified as either variable or fixed.

✅ Some costs, in practice, may have elements of both, making it difficult to accurately allocate costs to specific categories.


Limited scope..

✅ CVP analysis focuses primarily on short-term decision-making and does not take into account long-term strategic considerations, such as changes in the competitive landscape or shifts in consumer preferences.


Ignoring non-financial factors..

✅ CVP analysis does not take into account non-financial factors that can impact a company’s performance, such as changes in technology, regulatory environment, or social trends.


While CVP analysis can be a useful tool for decision-making..

✅ ..its limitations should be carefully considered before relying on it as the sole basis for making important business decisions.


Here is the video for dynamic comprehension..

Here is the briefing note for reading comprehension..