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Describe the limitations of the CVP (Cost, Volume and Profit) Analysis

Describe the limitations of the CVP (Cost, Volume and Profit) Analysis.

Answers

Simon
? The cost, volume and profit analysis assumes a single product or a constant mix of products. It assumes a constant price change which is not practically functional.
? In CVP, all other variables apart from volume remain constant, It assumes that only volume causes changes in revenue and cost. This removes the role played by the economies of scale, change in sales mix and the products quality.
? The assumption of the total cost and revenue function being linear is only likely to hold in a short run for restricted activities.
? Whereas CVP restricts cost only to fixed and variable components, some costs overlaps into semi-variable and semi-fixed functions.
? Fixed costs only remain constant in the relevant range, Beyond this level, fixed costs are likely to change to accommodate increase in capacity.
? Profits are calculated on a variable cost basis. If absorption costing is used, it may assume that production volumes are equal to sales volumes.
skilled writter answered the question on April 1, 2018 at 18:25

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