Week 4: Cost Volume Profit (CVP) Analysis
Questions for Week #4:
- Cost-Volume-Profit Analysis
- Based on your eBook readings and review of both the lesson and Becker content, discuss the basic assumptions of CVP analysis and how we can use CVP analysis in making decisions as managers.
- “Break-even analysis is of limited use to management because a company cannot survive by just breaking even.” Do you agree with this statement?
- How could managers use the break-even point when introducing a new product?
- Practice using the various CVP applications (break-even, target profit, and margin of safety) with practice exercises from the text.
- Variable Costing
- Why doesn’t GAAP allow variable costing financial statements for external use?
- Discuss how JIT inventory concepts affect variable costing financial statements.
- Explain how a manufacturing company can bury fixed production costs in ending inventory under full costing.
or
Please interpret Company A and Company B’s results below in terms of the factors that impact Cost Volume Profit Analysis (CVP). Why does Company B have the greater degree of operating leverage? As a manager, why is operating leverage an important concept?
| Company A | Company B | ||||
| Sales (10,000 units times $26) | $260,000 | Sales (10,000 units times $32) | $320,000 | ||
| Less Variable expenses (10,000 units $16) | 160,000 | Less Variable expenses (10,000 units times $20) | 200,000 | ||
| Contribution margin (a) | 100,000 | Contribution margin (a) | 120,000 | ||
| Less Fixed expenses | 80,000 | Less Fixed expenses | 100,000 | ||
| Net operating income (b) | 20,000 | Net operating income (b) | 20,000 | ||
| Degree of operating leverage (a divided by b) | 5.0 | Degree of operating leverage (a divided by b) | 6.0 |