Why do airlines make use of break-even analysis (perhaps more than in many other industries)? Are there any characteristics of these companies, their operations and cost structures which can explain this?
Would the analysis of load factors be different for a budget airline compared with a traditional airline which is not competing based on prices?
To what extent do the assumptions behind the analysis limit the usefulness of the technique in these circumstances? Or do they?
Are there any other industries which share similarities with the airline industry where we might also expect to see more use of break-even analysis than in other industries?
(200 word)
-Cost–volume–profit (CVP) is an analytic method of accounting, which concentrates essentially on the influence of various levels of volume and cost on the operating profit. The analysis offer managers a clear and sensible way of evaluating and predicting the financial plan of business (Le et al., 2020). However, it applies various assumptions and simplifications about cost behaviour to the point that it merely operates in ideal conditions. These assumptions make CVP to restrict its application in real life, as will be considered below.
CVP assumes that the unit revenues and unit variable costs as fixed. This assumption is, still, suitable only for small variations in productions and sales. CVP also keeps that a tight detachment within variable and set costs, however eventually, thereby causing CVP fit for short-run, marginal analysis (Punniyamoorthy, 2017). For long-term evaluation, which regards a product’s entire life-cycle, one is essential to use by accounting or activity-based costing. The CVP analysis also represents a point at which a firm achieves no loss or profit, therefore revealing a breakeven situation.
CVP further assumes that all the units manufactured are sold. Moreover, the change that happens in payments occurs as a result of changes in the level of activity (Boyd & Pitre, 2020). Fixed costs are, however, not possible to stay steady due to differences in output that may progress beyond a presented activity range. Furthermore, the analysis is restricted to the specified scale beyond which the result converts unreliable.
Finally, CVP frequently reflects volume as the central factor that influences the cost. However, there are other factors, such as technology, range, expansion, and capability that affect costs. The linear property assumption of income and price is based on the idea that the selling rate and unit variable costs are fixed ( Dash,2020 ). This consequently valid not beyond the relevant period.
Prominent firms such as Boeing and airbus use cost volume profit analysis (CVP) to assess the number of aeroplanes they require to trade to recoup multi-billion -dollars expenses of sketching and generating new aeroplanes. (HKU,2015), The leaders then make a sensitivity analysis to assess how sensitive their assumptions are to various options, as the extent airline market, its selling value, furthermore the business share they expect it can attract ( Horngren et al.,2015 ).
References
Boyd, J. and Pitre, R., 2020. Creating relevance in managerial accounting. Journal of Education for Business, 95(5), pp.331-334. Available at :
Dash, M., 2020. Applicability of the CVP Model for the Indian Sugar Sector. Asian Basic and Applied Research Journal, pp.1-5. Available at : https://www.globalpresshub.com/index.php/ABAARJ/article/view/808 [Accessed : October 8, 2020].
Horngren, C.T., Datar, S.M. and Rajan, M.V., 2015. Cost accounting: A managerial emphasis. Available at :
LE, O.T.T., TRAN, P.T.T., TRAN, T.V. and NGUYEN, C.V., 2020. Application of Cost-Volume-Profit Analysis in Decision-Making by Public Universities in Vietnam. The Journal of Asian Finance, Economics, and Business, 7(6), pp.305-316. Available at : https://www.koreascience.or.kr/article/JAKO202017764018157.pdf [Accessed : October 8, 2020].
Punniyamoorthy, R. “Examining Cost Volume Profit And Decision Tree Analysis Of A Selected Company.” World Wide Journal Of Multidiscipl Inary Research And Development Wwjmrd 3, no. 9 (2017): 224-233. Available at : https://wwjmrd.com/upload/examining-cost-volume-profit-and-decision-tree-analysis-of-a-selected-company–.pdf [Accessed October 8, 2020].
The University of Hong Kong (HKU),china ,2015 ,available at : https://www.coursehero.com/file/p1rvgdc/companies-such-as-Boeing-and-Airbus-use-CVP-analysis-to-evaluate-how-many/ [Accessed October 8, 2020].
(200 words)
0Cost volume profit (CVP) analysis is an essential tool in helping decision making in relation with cost, the volume of activity and the profit. The major two assumptions of CVP are mainly shape of the cost and revenue curves. Three main types of cost were fixed cost, variable cost and semi-variable cost which aids in financial decision making for managers ( McLaney and Peter Atrill 2012).
CVP assessment is an ideal system to assess how the profit related to changes in the variable cost of a company or organisation. Besides that, the firm can review the number of unit sale to achieve break-even inclusion of total cost (Michael R.et al 2008).
In my organisation, we do utilise the three main costing types to make informed decisions around service delivery. However, we are a non-profit organisation and we do not monitor this from a profit or break – even portfolio. In our organisation, we use this type of cost about manpower, tangible and intangible assets.
In an airline industry, the cost is based on per seat and service delivery of the area seated in i.e. First class is more expensive than business or economy class due to luxury and etiquette of service. This is where most airlines start to make a profit although the majority of the airline seats are economy, I believe they consume this strategy to break-even. Furthermore, they provide a mediocre service, seat, customer experience for an average price. Moreover, in light of Covid 19; most services had to downscale their activity to maintain WHO international standards of social distancing and hygiene. This means that they had to be space limitations, causing a reduction in seating in an aircraft i.e. airlines were effected as all seats could not be filled. This saw an increase in the pricing per seat and a reduction of frequency of flights (reduction of operational cost) to allow for airlines to break-even during this period.
References
Eddie McLaney and Peter Atrill (2012) Accounting An Introduction (Sixth Edition). Pearson Education, chapter 1. Available online at, https://online.vitalsource.com/#/books/9781292312293/cfi/391!/4/4@0.00:0.00
Michael R. Kinney, Cecily A. Raiborn (2008) Cost Accounting Foundations and Evolutions (Ninth Edition). Cengage Learning, Chapter 9
Mustapha, N.N.S.N., Yazid, M.F.M. and Shamsudin, M.F., 2020. How the airline industry may rise post-covid-19 pandemic. Journal of Postgraduate Current Business Research, 1(1). Available online at,
http://www.abrn.asia/ojs/index.php/jpcbr/article/view/100 [Accessed on 12 October 2020]
(200 words)

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