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    List and Explain The Underlying Assumption in A CVP Analysis

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    Samuel Debebe
    CVP analysis helps managers understand how changes in output, price, variable costs, and fixed costs impact total costs, revenues, and operating income. It provides data on the relationships between these factors to inform decisions about volume, pricing, and costs. CVP analysis determines the break-even point where revenues equal costs and can calculate sales needed to achieve a target profit. It uses equations, contribution margin, and graphical methods to analyze costs and revenues over different output levels.

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    List and Explain The Underlying Assumption in A CVP Analysis

    Uploaded by

    Samuel Debebe
    23 views2 pages
    CVP analysis helps managers understand how changes in output, price, variable costs, and fixed costs impact total costs, revenues, and operating income. It provides data on the relationships between these factors to inform decisions about volume, pricing, and costs. CVP analysis determines the break-even point where revenues equal costs and can calculate sales needed to achieve a target profit. It uses equations, contribution margin, and graphical methods to analyze costs and revenues over different output levels.

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    CVP analysis helps managers understand how changes in output, price, variable costs, and fixed costs impact total costs, revenues, and operating income. It provides data on the relationships between these factors to inform decisions about volume, pricing, and costs. CVP analysis determines the break-even point where revenues equal costs and can calculate sales needed to achieve a target profit. It uses equations, contribution margin, and graphical methods to analyze costs and revenues over different output levels.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    23 views2 pages

    List and Explain The Underlying Assumption in A CVP Analysis

    Uploaded by

    Samuel Debebe
    CVP analysis helps managers understand how changes in output, price, variable costs, and fixed costs impact total costs, revenues, and operating income. It provides data on the relationships between these factors to inform decisions about volume, pricing, and costs. CVP analysis determines the break-even point where revenues equal costs and can calculate sales needed to achieve a target profit. It uses equations, contribution margin, and graphical methods to analyze costs and revenues over different output levels.

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    © All Rights Reserved
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    1.

    Explain how CVP analysis help for management decision making process
    CVP analysis assists managers in understanding the behavior of a product’s or service’s total costs, total
    revenues, and operating income as changes occur in the output level, selling price, variable costs, or fixed
    costs. Managers are concerned about the impact of their decisions on profit. The decisions they
    make are about volume, pricing, or incurring a cost. Therefore, managers require an understanding
    of the relations among revenues, costs, volume, and profi t. The cost accounting department
    supplies the data and analysis, called cost-volume-profit (CVP) analysis, that support these
    managers.
    2. List and explain the underlying assumption in a CVP analysis
     Changes in the levels of revenues and costs arise only because of changes in the
    number of product (or service) units sold. The number of units sold is the only revenue driver and the
    only cost driver. Just as a cost driver is any factor that affects costs, a revenue driver is a variable,
    such as volume, that causally affects revenues.
     Total costs can be separated into two components: a fixed component that does not
    vary with units sold and a variable component that changes with respect to units sold.
     When represented graphically, the behaviors of total revenues and total costs are linear (meaning they
    can be represented as a straight line) in relation to units sold within a relevant range (and time period).
     Selling price, variable cost per unit, and total fixed costs (within a relevant range and
    time period) are known and constant.
    3. How can CVP analysis be used by a company ?
     CVP analysis has wide-range applicability.
     It can be used to determine a company’s break-even point (BEP), which is that level of activity, in units or
    dollars, at which total revenues equal total costs.
     CVP analysis can also be used to calculate the sales volume necessary to achieve a desired target profit

    4. List and explain the three approaches to analyze a CVP problems?


    a. The equation method

    useful when managers want to determine operating income at few specific levels of sales (for example 5,
    15, 25, and 40 units sold)

    b. The contribution margin method


    useful when managers want to determine operating income at few specific levels of sales (for example 5,
    15, 25, and 40 units sold)

    c. . The graph method

    In the graph method, we represent total costs and total revenues graphically

    The graph method helps managers visualize the relationship between units sold and operating income over a wide
    range of quantities of
    units sold
    5. Explain the following terms
    I. Contribution margins
    Contribution margin indicates how much of a company’s revenues are available to cover fixed costs. It helps in
    assessing risk of loss. Risk of loss is low (high) if, when sales are low, contribution margin exceeds (is less than)
    fixed costs.

    II. Breakeven point


    The breakeven point (BEP) is that quantity of output sold at which total revenues equal total costs—that is, the
    quantity of output sold that results in $0 of operating income.

    III. Sensitivity analysis


    Sensitivity analysis is a “what-if” technique that managers use to examine how an outcome will change if the
    original predicted data are not achieved or if an underlying assumption changes. In the context of CVP analysis,
    sensitivity analysis answers questions such as, “What will operating income be if the quantity of units sold decreases
    by 5% from the original prediction?” and “What will operating income be if variable cost per unit increases by
    10%?” Sensitivity analysis broadens managers’ perspectives to possible outcomes that might occur before costs are
    committed.

    IV. Margin of safety


    The margin of safety answers the “what-if” question: If budgeted revenues are above breakeven and drop, how far
    can they fall below budget before the breakeven point is reached? Sales might decrease as a result of a competitor
    introducing a better product, or poorly executed marketing programs, and so on.

    6. Explain how do nonprofit organization apply CVP model in their administrative


    decision ?
    To apply CVP analysis in service and nonprofit organizations, we need to focus on
    measuring their output, which is different from the tangible units sold by manufacturing
    and merchandising companies

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