Your company, Diamond Dynamics, is researching whether or not it would be a good

Question

Your company, Diamond Dynamics, is researching whether or not it would be a good decision to invest in new manufacturing equipment that will significantly speed up production time on the assembly line. However, the total cost of the equipment and installation, not including any maintenance plan, is a hefty investment of roughly $850,000. In a 500-word description, Explain how a CVP analysis would be useful for determining whether or not the investment is worth it. Also, explain the limitations of a CVP analysis in this situation and for making managerial decisions in general.

Explanation / Answer

Cost volume profit analysis is used to determine how company's operating profit and net income will be affected by change in cost and volume.

Therefore it is clear from the defination only that a company should invest in that business that will increase the profit and whose cost shall be least.Further the benifit of use of cost volume profit analysis is that CVP involves the determination of either of the variables (cost, profit or volume) given a relevant set of data. This includes the price per unit, cost per unit, fixed cost, and/ or profit.

CVP generally applied to long term of a business. In each and every organisation profit is depend on different kind of factors out of which the key are sales and cost of manufacturing.These factor are interrelated.In order to achieve the projected level of profitability, management has to exercise control over management of costs, largely variable cost

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