CVP analysis – the effects of too much volume ?
Last summer I again took the car to Europe, using the Dover-Calais crossing. Not too long before I went I read an article about a UK Competition Authority ruling against one of the ferry operators – read here.
One of the operators is (now) owned by euro tunnel, hence the competition ruling. But let’s bring this to basic costs, volumes and profits. The ship I travelled on was almost empty, and as there is so much capacity on the route some operators are being pushed into a loss scenario. Why? Well, think about it for a moment – costs of running a large ferry are probably quite fixed. Prices may be low due to competition, but volume is relatively static. So, lowering price to attract passengers may be a loss maker. Similarly, too many operators may mean smaller passenger numbers for all, driving some into a loss situation.
So, as basic economics may dictate, ultimately one operator will fail as the market will force them out. And remember CVP analysis is based on a subset of the cost curves used in economics.