Critics of CVP analysis

Critics of CVP analysis claim that the assumptions underlying the analysis are almost certain to be violated in practice, thus severely limiting the practical value of the various techniques covered in this chapter. Moreover, say the critics, in the highly competitive environment in which many companies operate, the assumptions necessary for CVP analysis are even more likely to be violated. Arguably, companies that face stiff competition and thus could benefit most from CVP analysis may be the least likely to be able to use the techniques because of the restrictive assumptions.

Required:

Do you agree with the claims made by the critics of CVP analysis regarding its limited value in practice? Why or why not?

Sample Solution

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