Cost Volume Profit (CVP) analysis is a powerful tool used in managerial accounting to understand the relationship between costs, sales volume, and profit. This analysis helps organizations, including Federally Qualified Health Centers (FQHCs), to make informed financial decisions by assessing how changes in costs and volume affect profit.
Key Assumptions of CVP Analysis:
Linear Revenue and Cost Functions: The analysis assumes that total revenues and total costs can be plotted as straight lines. Thus, the unit selling price, unit variable cost, and total fixed costs remain constant.
Single Product or Constant Sales Mix: The analysis assumes either a single product or a consistent sales mix if multiple products or services are involved.
All Units Produced Are Sold: It is assumed that there is no change in inventory levels; all produced units or services provided are sold within the same period.
Categorization of Costs: All costs can be categorized as either fixed or variable. Fixed costs remain constant regardless of output levels, while variable costs change in proportion to output.
Short-term Analysis: The analysis is generally used for short-term decision-making and assumes stable market conditions, production capacity, and prices.
Constant Efficiency and Productivity: The analysis assumes that productivity and efficiency levels remain constant throughout the period.
Case Study: Expanding Mental Health Services at an FQHC
Our FQHC, “Community Health Solutions,” is considering expanding its mental health services by adding a new psychiatrist to its team. To decide on the feasibility of this expansion, we conduct a CVP analysis.
Data:
Average Revenue per Patient Visit: $100
Variable Cost per Patient Visit: $30 (including medical supplies, administrative costs, and support staff wages)
Fixed Costs for the New Psychiatrist: $10,000 per month (salary, benefits, office space)
Projected Monthly Patient Visits: 300 visits
Analysis:
1. Calculate the Contribution Margin per Visit: Contribution Margin=Revenue per Visit−Variable Cost per Visit=$100−$30=$70
2. Determine the Breakeven Point: Breakeven Point (in visits)=Contribution MarginFixed Costs=7010,000≈143 visits
3. Calculate the Projected Profit: Total Contribution Margin=Projected Visits×Contribution Margin=300×70=$21,000 Projected Profit=Total Contribution Margin−Fixed Costs=21,000−10,000=$11,000
The CVP analysis indicates that “Community Health Solutions” needs to provide at least 143 patient visits per month to cover the fixed costs of adding a new psychiatrist. With a projected volume of 300 visits, the expansion is expected to generate a profit of $11,000 per month, making it a financially viable decision.
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Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Managerial Accounting: Tools for Business Decision Making (9th ed.). Wiley.
