Cost Volume and Profit:
7.) How should mixed cost be classified in CVP analysis? What approach is used to effect the appropriate classification?
According to chapter 6, page 261 in our text, mixed cost must be classified into their fixed and variable elements. The best approach because of time and cost restraints is to determine what eh fixed and variable cost are on an aggregate basis at the end of a period of time. Many methods can be used, but the high-low method is the one I will explain. High-low method takes, at high and low level of activity, the total cost incurred. Only one variable cost can change as the activity levels change. The difference in the cost represents the variable cost. The formula is as followed: Change in total cost/High minus low activity level = variable cost per unit.
9.)”Cost-Volume-Profit (CVP) analysis is based entirely on unit cost.” Do you agree? It does seem that it is based on unit cost. Cost-volume-profit is the study of the effects of change in cost and volume on a company’s profits. Management uses it to set prices for product, to determine what sells with what. The only think within the analysis that does not use units is fixed cost, this is because fixed remains constant as activity changes. Everything else changes with activity. The CVP income statement puts it into prospective what the units are, and where things belong. In determining the totals of sales, variable cost, contribution margin, and fixed cost, along with net income, you need to know or figure what your unit selling price is, unit variable cost are, total monthly fixed cost, and the units sold.
14.) Linda Fearn asks for your help in constructing a CVP graph. Explain to Linda A.) How the break -even point is plotted and (B) how the level of activity and dollar sales at the break-point are determined.
To determine how the break-point is plotted, you have to plot total revenue. Next you will plot total fixed cost using a horizontal line. After...
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