Cost Volume Profit Analysis
Cost Volume Profit (CVP) analysis is a managerial tool used to evaluate a firm’s cost structure, break-even point, and operating leverage. It is also used by most senior managers to make quick assessments of proposed changes to the firms cost structure. The service science model advocates investment into talented personnel and performance offerings (Spohrer and Maglio, 2008). This emphasis will create changes in a firms cost structure. To the extent these changes increase financial vulnerabilities the service science model will experience resistance from those that rely on this basic accounting tool. Established service firms have a higher reliance on fixed costs. A successful firm will secure highly talented staff though the stability of full time employment contracts. It will also favor the security of supply that
小型网络设计-校园网建设 comes from owning key technology. As a result, a service firm that is fully pursuing new approaches to joint value creation will also likely increase its fixed costs. The impact of this in a accounting sense is that the firm becomes more vulnerable to shifts in sales. Incremental revenue causes little increase in the cost of these firms. This kind of business structure would increase the needed break-even volume but also significantly increase in operating leverage. When performing at, or near break-even, such a firm will be far more vulnerable to splashy losses than those with more variable costs due to their本文来自优.文,论^文·网原文请找腾讯752018766 to bidding errors. Much of the rotating bankruptcy situation in the US airline industry can be attributed to this. Until recently their major costs were capital commitments to aircraft and airport facilities. It was very easy to bid down the price to fill seat capacity to maximize the short run contribution margin. The variable costs for this service are a small portion of the total economic cost. Over time though the infrastructure has to be paid for regardless of how positive income from operations is. The proponents of service science will need to consider this financial metric. Accounting departments have a natural propensity towards variable costs because it reduces financial risk. Decreased profits from diminished margins at higher volumes are less of a problem than negative cash flow in an accounting paradigm. Plans to move towards more fixed costs will run into a headwind from accounting. The value proposition will have to be more comprehensively documented than an equivalent cost reduction proposal to invest in cost cutting. Another possible solution is to tie into an emphasis the accounting literature that views utilization as a way to increase valuation.
Capacity Utilization
Capacity unitization is emphasized by accounting and operations management scholars with regards to their definition of service management. A simple illustration reveals why. A hair stylist rents a facility for $1,000 per day in the business district to be convenient for his clientele of CEOs. Movements from 1 to 2, 8 to 9, or any other practical increase in utilization make a powerful change in the cost per customer. This dynamic is why service pricing is so problematic (Brignall, 1991). Price competitive providers are those that allocate customers to fit into their limited service capacity. A common example would be an accounting firm pushing eligible clients to adopt a June 30th year end to make use of idle staff in the summer. It is a capacity driven approach.
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