Sample Essay

The model explains a variety of technical features of cost volume profit analysis, which shows the depth of cost and profit association. For instance if we take the cost function table below, this association can be easily analyzed with the help of computations and findings shown in this table:

Cost Function ($ milions)

Fixed Costs:

Rental Cost

500

Employee Wages

1000

Total Fixed Cost

1500

Variable Cost

Cost of Beverage and Snacks

2000

Cost of Napkins, Straws etc

500

Total Variable Cost

2500

Total Cost

4000

Variable Cost estimation

50%

Increase in Revenue 50%

7500

Cost Function

5250

Variable cost accounts for 50 percent of the revenue, which means with the increase in revenues variable cost increases significantly and the total cost will rise accordingly. To keep the cost burden low we can reduce our fixed cost to maximize profits. Fixed costs can be reduced in different ways: layoffs play a pivotal role in reducing fixed costs, utility expenses can be cut down to reduce fixed utility cost, other fixed expenses can be controlled to cope up with fixed costs. When sales increases for a company, the prime objective is to meet the profit targets that the firm sets in order to maintain its credibility and to gain strength in competitive and strategic terms. Through financial models these strategies are defined in policies to establish the criteria for a firm to meet its sales targets and to achieve maximum profitability.

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