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C-V-P equation.Contribution margin - Essay Example

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The C-V-P equation or the Cost Volume Profit Analysis is a major step in major decisions. It is the model which defines a relationship between the sales price, cost or production, sales volume and other costs of any product. …
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C-V-P equation.Contribution margin

Download file to see previous pages... The C-V-P equation or the Cost Volume Profit Analysis is a major step in major decisions. It is the model which defines a relationship between the sales price, cost or production, sales volume and other costs of any product. The major purpose of this model and its application is the predictability of future profits and its change based on changes in either volume or any of the components of costs that it takes into account.It is important for managers to decide if their materials costs and other direct variable costs are too high given the revenue from the product. Keeping aside the fixed costs which have to be borne irrespective of the sales revenue, the remaining costs which are directly proportional to units sold can be minimized to manage cash flows in a better way. They can cut on their variable costs by having a look at the contribution margins of their company and their products.The contribution of sales to before tax profits, or gross profits, over and above the break even is exactly the contribution margin as there are no fixed costs any more. The amount after the deduction of variable costs from the revenues will be added to the profits.CVP graphs help the manager and the reader to have a better figure of the relationship between the profits, sales and volume of sales. CVP graphs also helps in viewing the breakeven points on the graph and provides a better insight into the profit-impact of increased sales or costs.When we have a increase in the fixed costs, the breakeven point changes. ...
13. When other factors are constant, what is the effect on profits of an increase in fixed costs Of a decrease in variable costs
When we have a increase in the fixed costs, the breakeven point changes. The breakeven point is the point where the profits are zero or the total contribution margin is equal to the fixed costs. It's a no-profit and no-loss position.
When the fixed costs increase in the [(Fixed costs) / (contribution margin)] calculation of break-even point, the number of units to break even increases. If there is a decrease in variable costs, the contribution margin increases, given the same price. Due to this, the break even units decrease as the denominator is increasing.
14. What are the limiting assumptions of C-V-P analysis
The CVP model assumes that the prices of the units will remain constant and do not change in the entire process. Variable and fixed components can be easily and accurately calculated for units. The determination of fixed and variable costs, in actual conditions, is very difficult. Inventories are available at all times to make sales and that there is no shortage of supply of products to sell. The sales mix remains constant for multi product companies too.
Practice 16-3 Linearity of Variable Costs within the Relevant Range
The company has assembled the following data about its variable costs:
Level of Activity
Total Variable Cost
1,000 units
$ 25,000
2,000 units
3,000 units
4,000 units
5,000 units
The company is currently producing 3,300 units. According to these data, what is the relevant range over which the company can assume that the variable cost per unit is constant
In this case, the ...Download file to see next pagesRead More
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