Cost-Volume-Profit (CVP) Analysis

Cost-Volume-Profit (CVP) Analysis
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Cost-Volume-Profit (CVP) Analysis
The contribution margin measures the cost that is not consumed by the variable costs and contributes to the fixed costs for the production of drones for commercial purposes (Boyd, et al., 2014). Based on the spreadsheet computations, the project has a contribution margin of 8 dollars. The figure obtained from the contribution margin computation is essential in the calculation of the target income and break-even analysis.
On the other hand, net present value allows the manager to determine the current value of all the investment that will be committed in the future (Stickney, 2010). The proposal on commercial drones’ project should be estimated to assess their current values. The value obtained is applied in capital budgeting and determining the profitability of the investment project. For the proposed project by Amazon, the net present value is estimated at $ 870. Considering the figure is positive, the income that will be generated from the investment in drones by Amazon will exceed the projected costs (Bierman, 2010). Therefore, Amazon should proceed with the investment project as it will increase its profitability and asset position in future. A company should only consider investments with a positive net present value as the projected cash flow will be higher compared to the cash outflow.
Alternatively, a company can apply the internal rate of return budgeting as well as estimating the profitability of future projects.

The internal rate of return represents the point that the summation of the net present value totals to zero (Brigham & Houston, 2017). IRR is the rate where the future costs and projected income are equal. Generally, investment project with a high internal rate of return is desirable. IRR is applied in ranking investment with similar capital outlay (Kinney & Raiborn, 2013). In the case of the proposed drone investment, the internal rate of return is approximated as 9.48 percent. Based on the three criteria, it is viable for Amazon to invest in drones as it will improve the profitability of the company.

References
Bierman, H. (2010). An introduction to accounting and managerial finance: A merger of equals. Singapore: World Scientific.
Boyd, K., Epstein, L., Holtzman, M. P., Kass-Shraibman, F., Loughran, M., Sampath, V. S., Tracy, J. A., … Welytok, J. G. (2014). Accounting all-in-one for dummies.
Brigham, E. F., & Houston, J. F. (2017). Fundamentals of financial management.
Kinney, M. R., & Raiborn, C. A. (2013). Cost accounting: Foundations and evolutions.
Stickney, C. P. (2010). Financial accounting: An introduction to concepts, methods, and uses. Mason, OH: South-Western/Cengage Learning.