CVP analysis requires costs to be categorized as
either fixed or variable
with respect to fixed costs, CVP analysis assumes total fixed costs
remain constant across changes in volume
CVP analysis relies on the assumption that costs are either strictly fixed or strictly variable. Consistent with these assumption, as volume decreases total
costs decrease
CVP analysis is based on concepts from
variable costing
major assumption underlying CVP analysis
for multi-product situations, the sales mix can vary at all volume levels
in CVP analysis, linear functions are assumed for
contribution margin per unit
factors involved in studying cost-volume-profit relationships
product mix, variable costs, and fixed costs
CVP relationships that are curvilinear may be analyzed linearly by considering only
a relevant range of volume
after the level of volume exceeds the break-even point
the total contribution margin exceeds the total fixed costs
what will decrease the BEP
decrease in fixed cost and increase in selling price
at the BEP, fixed costs are always
equal to the contribution margin
the method of cost accounting that lends itself to break even analysis is
variable
break even sales level in units calculation
fixed cost/ (selling price per unit - variable cost per unit)
calculate variable costs
sales - [(CM/sales)*(sales)]
if a firms net income does not change as its volume changes, the firms
sales price must equal its variable costs
break even analysis assumes over the relevant range that
total variable costs are linear
compute break even point in units
fixed cost / CM per unit
CM ratio always increase when the
VC as a percentage of net sales decreases
incremental analysis focuses on
factors that change from one course of action to another
margin of safety
difference between budgeted sales and break even sales
calculate degree of operating leverage
CM / profit before taxes