March 26, 2013
Week Four Discussion Questions
The components of the cost-volume-profit or CVP analysis has five components. The components are “volume (levels of activity), unit selling price, variable cost per unit, total fixed costs, and sales mix” (Kimmel, etal, 2009, Chapter 19, Illustration 19-1). CVP analysis consists of target net income, income statement, margin of safety, and changes in the work environment. CVP analysis provides a business with a contribution margin. The revenue retained after the deduction of variable costs is the business’ contribution margin. “Contribution margin ratio is: the contribution margin per unit divided by the unit selling price. It is the percentage of sales that contributes to a business’ net income” (Kimmel, etal, 2009, Chapter 19).
“CVP analysis helps management understand the interrelationship among costs, volume, and profits” (Accounting For Management, 2012, pg.1). Managers can make decisions on the types of products to sell, and the prices of these products. Managers can use CVP analysis to determine the best strategy for marketing its products and services. Decisions on the type of facilities to obtain for production can also come from the CVP analysis. Question 2:
Break-even analysis is an “analysis to determine the point at which revenue received equals the costs associated with receiving the revenue” (Investopedia, 2013, pg.1). Break-even analysis only focuses on the costs of sales, making it a supply-side analysis. Break-even analysis does not take into consideration how the demand for a product or service is affected by prices. The break-even analysis does calculate the margin of safety or the amount of revenues exceeding the business’ break-even point.
CVP analysis works with break-even analysis in the following manner: in order to compute the break-even point, the fixed costs, variable costs, and prices...