The economic basis of effective management
Effective management of the sales department of products – the center of marginal profit is based on the manager’s understanding of the content of the economic and accounting model of the relationship dynamics “Costs of an enterprise – Production volume of finished products (goods purchased) and its sales – Profit”.
In the name of the models under consideration, the phrase “The volume of production of finished goods (purchase of goods) and its sales” is used with the use of the union “and”, which means simultaneity. This phrase means that:
(1) the models under consideration are applicable both to an industrial enterprise producing and selling finished products (works, services), and to a commercial enterprise purchasing and selling goods;
(2) all products manufactured (purchased) in the short-term period of activity will be sold in the same short-term period. For the practical implementation of this condition, it is necessary that the plan for the production of finished products (works, services) of the future period of activity corresponds to the forecast of the average consumer demand for products in the future period of activity.
The model of the dynamics of the relationship “The costs of the enterprise – The volume of production (purchases of goods) and its sales –Profit” (CVP-dynamics model) can be economic and accounting. The names of these models were formed in financial management (management accounting) and are used to designate different models of CVP dynamics.
The abbreviation “CVP” is formed by the first letters of the three English words “Cost”, “Volume” and “Profit”, meaning in translation from English “Expenses”, “Volume” and “Profit”, respectively.
The economic model of CVP dynamics is more general, more realistic, but also more complex, and describes the CVP dynamics over the entire range of possible changes in the “Volume of production (purchase of goods) and its sales” driver from zero to the maximum production (trade, logistics) capacity of an enterprise . In the CVP economic relationship model, the sales revenue curve is non-linear. With an increase in the volume of sales of products, an increase in the proceeds from sales of products is first observed close to linear. Then, with a certain volume of sales of products, the growth rate of revenue from sales of products begins to decline, then there is a cessation of its growth, and then – a decrease in revenue from sales of products. This is due to the fact that it is impossible to sell a larger volume of products in a competitive market and limited consumer demand for products without lowering the selling price. To increase the volume of sales of products it is required to reduce the price per unit of output, with the result that the revenue curve from sales of products will not rise so steeply and eventually will go down. This is due to the fact that the impact on the proceeds from the sale of products to reduce prices begins to exceed the effect of the increase in sales of products.
The curve of the total costs of the enterprise shows that with low production volumes (purchase of goods) and its sales, the total costs first increase revenues from sales of products and increase, which is, firstly, a result of the fact that the company has fixed costs of significant size, as the company calculated on a much larger volume of production (purchase of goods) and its sales, and, secondly, relatively high specific variable costs per unit of production, characteristic of low volumes of zvodstva products (purchase of goods) and its sale. In the area of average production volumes (purchase of goods) and its sales, total costs increase is not so cool, as the company has reached normal or close to it capacity and works in the most economical mode per unit of production. At the site, when the volume of production (purchase of goods) and its sales approached the maximum production (trade, logistics) capacity of the enterprise, the curve of total costs begins to rise more steeply, since in this area the costs per unit of production begin to increase. This happens because the enterprise is operated with a load above the average level, as a result of which there are “narrow” places in the organization of production and logistics, breakdowns occur more often and the output of production and logistics equipment fails, overtime work occurs.
As a result of the above-described behavior of the proceeds from the sale of products and the total costs of the enterprise, depending on the volume of production (purchase of goods) and its sales, there are two break-even points in which the proceeds from the sale of products are equal to the total costs of the enterprise.
The decisive difference in the CVP dynamics accounting model from the economic model is that the behavior of the sales revenue and the enterprise total costs behavior are analyzed in a much smaller internal subrange of the range of possible changes in the driver value.