Góc học tập
16/01/2018 08:41:38 AM

CVP Analysis in Service and Nonprofit Organizations

CVP analysis is useful for calculating the units that need to be sold to break even, or to achieve a target operating income or target net income. Managers also use CVP analysis to guide other decisions, many of them strategic decisions. Consider a decision about choosing additional features for an existing product. Different choices can affect selling prices, variable cost per unit, fixed costs, units sold, and operating income. CVP analysis helps managers make product decisions by estimating the expected profitability of these choices.

Strategic decisions invariably entail risk. CVP analysis can be used to evaluate how operating income will be affected if the original predicted data are not achieved—say, if sales are 10% lower than estimated. Evaluating this risk affects other strategic decisions a company might make. For example, if the probability of a decline in sales seems high, a manager may take actions to change the cost structure to have more variable costs and fewer fixed costs.

CVP analysis has focused on a merchandising company. CVP can also be applied to decisions by manufacturing companies like BMW, service companies like Bank of America, and nonprofit organizations like the United Way. To apply CVP analysis in service and nonprofit organizations, we need to focus on measuring their output, which is different from the tangible units sold by manufacturing and merchandising companies.

Examples of output measures in various service and nonprofit industries are as follows:

Industry

Measure of output

Hospitals

Patient days

Hotels

Room occupied

Universities

Student credit-hours

Airlines

Passenger miles

Consider an agency of the Massachusetts Department of Social Welfare with a $900,000 budget appropriation (its revenues) for 2011. This nonprofit agency’s purpose is to assist handicapped people seeking employment. On average, the agency supplements each person’s income by $5,000 annually. The agency’s only other costs are fixed costs of rent and administrative salaries equal to $270,000. The agency manager wants to know how many people could be assisted in 2011. We can use CVP analysis here by setting operating income to $0. Let Q be the number of handicapped people to be assisted:

Revenues – variable costs – fixed costs =0

$900,000 - $5,000 Q - $270,000 = 0

$5,000 Q = $900,000 - $270,000 = $630,000

Q = $630,000 / $5,000 per person = 126 people

Suppose the manager is concerned that the total budget appropriation for 2012 will be reduced by 15% to $900,000 (1 0.15) $765,000. The manager wants to know how many handicapped people could be assisted with this reduced budget. Assume the same amount of monetary assistance per person:

$765,000 - $5,000 Q - $270,000 = 0

$5,000 Q = $765,000 - $270,000 = $495,000

Q = $495,000 / $5,000 per person = 99 people

Note the following two characteristics of the CVP relationships in this nonprofit situation:

1. The percentage drop in the number of people assisted, (126 99) 126, or 21.4%, is greater than the 15% reduction in the budget appropriation. It is greater because the $270,000 in fixed costs still must be paid, leaving a proportionately lower budget to assist people. The percentage drop in service exceeds the percentage drop in budget appropriation.

2. Given the reduced budget appropriation (revenues) of $765,000, the manager can adjust operations to stay within this appropriation in one or more of three basic ways: (a) reduce the number of people assisted from the current 126, (b) reduce the variable cost (the extent of assistance per person) from the current $5,000 per person, or (c) reduce the total fixed costs from the current $270,000.