Introduction
run a successful small business requires mobility adept of the many options that have been created by the market is constantly changing. The cost of the size of the profit analysis (CVPA) is an effective tool that can help answer the user important, such as "What is the price of Questions should be primarily responsible for this product or service?", "What of my products or services is the most profitable?", And " what is the best operating pressure level for practical given the current market conditions? "
Fixed understand, semi-variable and variable costs
before you can use CVPA, constant, it is necessary to determine the semi-variable and variable costs. Determining these costs is a very useful tool in itself, but that's another white paper.
Fixed costs are those costs incurred by your business, regardless of sales volume. These are costs such as rent, insurance, and annual license fee for the work. The volume of sales, not to exceed current capacity, has no effect.
Variable costs are those costs that are directly affected in terms of sales volume. These include elements such as the cost of goods sold, sales commissions, travel expenses, if you're the service provider who is traveling as a result of the provision of services.
semi-variable costs, as you have now determined, are those costs which increase with sales volume but not directly with the variable costs. An example of semi-variable cost for the auto body shop may be equipment maintenance expense. At some point, the equipment starts to break that to maintain a constant level was not increased with use. Therefore, in order to avoid hardware failure as a result of excessive use, the employer must spend additional funds on maintenance of equipment.
draw
There are many benefits to using CVPA. First, it shows what the break-even point, in units or dollars, for a particular product or service, due to the sale price set. Parity is the point at which covers sales revenue in all the fixed costs for the year in addition to all variable costs up to that point sales. For example, if the fixed cost for the year is $ 1,000, variable costs per unit total of $ 1.00, competitive product at the $ 5.00 level, then it should be selling 250 units to cover fixed and variable costs valued at $ 1,250.
As you may have noticed, not only does not show CVPA equalizer, but it can be used to analyze price sensitivity. For example, if your competitors are capable of the same product price at $ 2.50, but were not able to go $ 3.00 below, then it may be time to consider several options: stop the product, find a way to reduce static variable and costs to can the price at $ 2.50, the product in some way that sets it apart in a positive way from the competitor's one of your hamburger square versus round Hamburger or use the product CD as a "loss leader" to get customers in the door.
contribution margin
determine the contribution margin for your business is the additional benefit of CVPA. Contribution margin is simply the amount of each dollar sales left after all variable costs are covered. It is that part of the dollar sales that can be allocated to cover the fixed costs.
know the sidelines of the public contribution is useful because it can be compared to prior periods, to determine whether it is moving positively or negatively. In addition, the contribution margin can be applied in the analysis of individual products and product lines and services, or services lines. Knowing the sidelines of the contribution of a specific product or service that helps determine whether carrying this product or perform the service on the other is the best decision. Moreover, contribution margin is very useful in understanding the development of better pricing for your business strategy.
One final benefit to learn how to determine the contribution margin is that you can point out the most profitable products or services, although sales may indicate something different. For example, if the product has sales of $ 100K and Product B has sales of $ 80K, it seems, based on the total sales alone, this product A is the product more attractive to confirm. But the margin of a quick analysis reveals the contribution of this product B contributes 0.49 cents of every dollar sales to cover the fixed costs compared with 0.34 cents a product. It is clear that the product B is a real contributor and should be part of the product mix this seller.
operating leverage
in gaining an understanding of the labor force, let us reconsider our hypothetical owner of auto body shop. It has seen its maintenance and servicing expenses increased because of all the additional machines use her growing up because of the recent trend in sales and large.
it faces a decision: they must invest in additional fixed assets to deal with the additional sales volume or continue only with the current fixed assets have a platform?
without operating pressure of understanding, and that the owner of the company does not have the value of information that can help them take the best decision. Leverage is the degree used by business fixed costs to generate profits operate. The higher the degree of dependence fixed cost, the greater the increase in profits through sales up power and the largest loss in sales by trend.
fixed assets usually carry fixed costs, and payments funded equipment, additional insurance, etc., and to invest in additional equipment is something our body cars and shop owner want to seriously consider whether the sales trend up wing they see something that she believes that the phenomenon of long-term be. If you think sales trend up to actually be in the long term, then invest in additional fixed assets may be just the thing for her to do.
CVPA is one tool we have the owner of an auto body shop can be used to help determine what needs to be done in this case. Using a model with a tie and looking in the margins of the contribution, she can perform sensitivity analyzes to help determine whether or not to increase operating leverage in an attempt to take advantage of sales of up trend.
Summary
CVPA is a tool that can be used to help answer questions you may have about the products and services your pricing, or lack of investment in additional capital items, and which products and services to confirm. While there is no magic bullet one, CVPA is a nice tool to have in your bag business analysis to help you make the right decisions when answering these types of questions.
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