As upper-level management it is important to understand the key components of cost-volume-profit analysis. Identifying objectives including concepts related to CVP is crucial to the absorption of information. The paper provides a summary of Tesla Motors, the company outlined. Explaining the relationship between cost-volume-profit analysis is discussed as well as how the company is using this tool to maximize production and profit. Summary
Tesla Motors, Inc. is a company based in Silicon Valley. Telsa designs, manufactures, and sells electronic cars. Telsa is a publically traded company that trades in NASDAQ stock exchange. Telsa became well known after producing the Telsa Roadster, the first fully equipped eclectic sports car. In addition, Telsa also sells power train components like lithium-ion batteries to other auto makers.
According to Morris (2012), “CEO Elon Musk announced that the company has stopped burning cash and reached the break-even point, a major milestone for any start-up.”(Morris, 2012). Tesla has been producing 200 cars per week and according to the article, Tesla expected to increase that quantity to 400 cars per week by December 2012. Although Tesla has reached its break-even point, their concern at this point is to fulfill the more than 5,000 advanced orders as they understand the importance in making sure the customers get what they ordered and meeting profit goals. Weekly Objectives Relevance
Two essential accounting concepts can be applied in understanding Tesla’s economic position: 1) cost – volume – profit (CVP) analysis and 2) the breakeven point. First, a cost-volume- profit (CVP) analysis is defined as “the study of the effects of changes in costs and volume on a company’s profits” (Kimmel, Weygandt, & Kieso, 2009). In the case of Tesla’s current state, it appears a proper CVP analysis was conducted because Tesla effectively overseeing production costs and keeping expenses low compared to the volume and price tag they are offering to their customers. Positioning themselves in this manner is how they could reach the break-even point, “a major milestone for any start-up” (Morris, 2012).
Reaching the break-even point, the point where there is no loss or gains in terms of profit, proves that Tesla is setting their business up for success as they will begin to see revenue after hitting this mark (Kimmel, Weygandt, & Kieso, 2009). The only problem Tesla faces is the huge demand for their product with more than 5,000 advanced orders pending fulfillment (Morris, 2012). If Tesla is cannot meet this demand while keeping expenses down yet filling these orders in a timely manner, revenue will be lost as well as credibility and reliability of Telsa to deliver to their customers’ needs. Components of Cost-Volume-Profit Analysis
According to, Skills for Business Decisions, “Cost-volume-profit (CVP) analysis examines changes in profits in response to changes in sales volumes, costs, and prices.” (Kimmel P.D. 2009) A company’s profit is the CVP profit equation of Profit = Revenue – Expenses. A Cost-volume-profit (CVP) analysis consists of five basic components that include: ▪ Volume/level of the activity
▪ The Unit selling price ▪ The Variable cost per unit ▪ The Total fixed cost ▪ The Sales mix The components are essential to predicting profit margins and measuring the success of the company. Each component has an effect on profits. Lesser volume, increased cost per unit, and reduce sales would decrease profits. On the other hand, higher than projected sales would increase profits, provided the company can manufacture more product than originally projected. CVP analysis is important when profit planning. It also is a significant part in such management decisions as setting selling prices, determining product mix, and maximizing use of production facilities (184.108.40.206). A change in any of the projected components will cause management to revisit CVP analysis for updated projections. A Cost-Volume-Profit Analysis also consists of the CVP income statement, break-even analysis, margin of safety, target net income, changes in business environment, and the CVP income statement revisited. Companies perform and revisited “CVP analysis to plan or adjust future levels of operating activity and provide information about: ▪ Products or services to emphasize
▪ The volume of sales needed to achieve a targeted level of profit ▪ The amount of revenue required to avoid losses ▪ Whether to increase fixed costs ▪ How much to budget for discretionary expenditures ▪ Whether fixed costs expose the organization to an unacceptable level of risk (220.127.116.11).”(Wiley 2012).
Conclusion This paper has provided a detailed summary of Tesla Motors productions and expected production to reach breakeven point. The paper has outlined the two concepts from week four breakeven and CVP analysis that are assessed within the highlighted organization. The by and large the goal for Tesla Motors is to produce at the highest capability and turn over a profit. Understanding that changes in either fixed or variable costs directly affect profit levels are an important concept to take away. By using the datum in place as well as formulas, management has developed a plan of action that leads to profits made.