As in anything in life, there are advantages and disadvantages. CVP is no exception:

Advantages of CVP

1. Helps managers find out a breakeven point, target operating income etc.
2. Cost Volume Profit technique is used to evaluate investment proposals
3. Sets the base for planning the marketing efforts of a business
4. Helps in setting up the basis for budgeting activity

Disadvantages of CVP

1. In a current dynamic business environment, the costs and prices can't remain constant throughout the year. A manager is forced to react and make necessary changes in prices and costs due to change in economic conditions, customer bargaining powers, competitors etc.
2. All costs cannot be classified as fixed or variable. There is a significant list of costs which are neither fixed nor variable but are semi-variable or semi-fixed. Say, for example, a utility or electricity invoice contains rent as a component which remains constant irrespective of the change in usage of no. of electricity units.
3. No. of units cannot be the only driver of total costs and revenues. There are other factors also that impact the prices as well as costs. The raw material price reduction can reduce the variable cost and therefore the customers with knowledge of this change will demand a reduction in prices as well. Similarly, the entrance of a new big player in the market forces all the firms in the market to reduce their cost or compromise or bear loss of customers.

Which do you agree with and why?