To understand how Cost-volume profit (CVP) makes many simplifications and assump

To
understand how Cost-volume profit (CVP) makes many simplifications and
assumptions about cost behaviour, it would be prudent to understand what
is meant by cost behaviour. Cost behaviour varies depending on costs
incurred by a business in the production of goods and services and
reacts to changes in the level of output or input of the business
operation, referred to as volume of activity (McLaney & Atrill,
2023).
Using
CVP as an analysis tool allows for the consideration of costs incurred
in the production of the service to consider what the profit might look
like and allows organisations to make assumptions with numbers to
assess the achievable profitability they might likely achieve (Boyd,
2022)
However,
there is a caveat when analysing CVP to the reliance on several
assumptions which are used when preparing the analysis which if not
recognised can result in wrong conclusions being made (Drury, 2018).
Some of these assumptions include (but not limited to):
the prices of products are fixed and do not change
The fixed costs are the only costs that are truly fixed
Uncertainty does not exist
The model only considers a single product.
By
considering these assumptions you can see how this technique cannot
work in the real world as prices of products will vary, fixed costs are
never truly fixed, often businesses would wish to consider multiple
products and uncertainty does exist as the future is always uncertain.
Despite this, CVP is considered a useful tool particularly to work out
the breakeven point which calculates the amount of products which need
to be sold where there is no loss or profit i.e. breakeven (Kapil,
2011).
What alternatives are there to CVP analysis and in your opinion would they provide any more certainty than CVP analysis?