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Decision Making For Management - Linearity of Variable Costs within the Relevant Range - Assignment Example

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This paper "Decision Making For Management - Linearity of Variable Costs within the Relevant Range" focuses on the fact that 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 price, cost of production. …
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Decision Making For Management - Linearity of Variable Costs within the Relevant Range
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Download file to see previous pages 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 help in viewing the breakeven points on the graph and provide a better insight into the profit-impact of increased sales or costs.

When we have an 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.

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.

If the level of activity increases, the same dollar amount of fixed cost will be divided over a larger number of units and thus result in a lower per-unit fixed cost.   ...Download file to see next pagesRead More
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