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2. CheckPoint Cost, Volume, and Profit Questions
7. How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification? The mixed costs must be broken down into fixed and variable elements. After that is done then one needs to gather the information of the activity of the variable element in order to show the high end use and the low end use. It is important to separate these costs because the fixed cost will never change but the variable cost will always change depending on its activity. 9. “Cost-volume-profit (CVP) analysis is based entirely on unit costs.” Do you agree? Explain. I disagree with this statement. The reason I disagree is that the CVP needs to calculate the activity of the units sold as well as the cost of the unit. If one uses only the cost of the unit as a fixed rate they are leaving out the range of activity, and if not done very carefully can result in the wrong information being present. If the variable cost is not presented and separated from the fixed costs than one cannot determine the contribution margin which in turns makes it impossible to find the breakeven point. The contribution margin is used in determining the breakeven point and therefore necessary in the CVP analysis. 14. Linda Fear asks 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-even point are determined. The first thing I would do is tell her to draw two lines, a horizontal line and a vertical line. On the vertical axis line we will write sales and total costs in dollars for the company. On the horizontal axis line we will write sales and units produced. Now we need to plot two points from the sales revenue data and draw a straight line assuming that the price per unit does not change. The start of the line needs to be where the two axes meet or at the very corner of the graph. With that done
7. How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification? The mixed costs must be broken down into fixed and variable elements. After that is done then one needs to gather the information of the activity of the variable element in order to show the high end use and the low end use. It is important to separate these costs because the fixed cost will never change but the variable cost will always change depending on its activity. 9. “Cost-volume-profit (CVP) analysis is based entirely on unit costs.” Do you agree? Explain. I disagree with this statement. The reason I disagree is that the CVP needs to calculate the activity of the units sold as well as the cost of the unit. If one uses only the cost of the unit as a fixed rate they are leaving out the range of activity, and if not done very carefully can result in the wrong information being present. If the variable cost is not presented and separated from the fixed costs than one cannot determine the contribution margin which in turns makes it impossible to find the breakeven point. The contribution margin is used in determining the breakeven point and therefore necessary in the CVP analysis. 14. Linda Fear asks 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-even point are determined. The first thing I would do is tell her to draw two lines, a horizontal line and a vertical line. On the vertical axis line we will write sales and total costs in dollars for the company. On the horizontal axis line we will write sales and units produced. Now we need to plot two points from the sales revenue data and draw a straight line assuming that the price per unit does not change. The start of the line needs to be where the two axes meet or at the very corner of the graph. With that done
References: Atiase, R., Bamber, E., Bamber, L., & McCartney, J. (1989). Linear Versus Nonlinear Cost-Volume-Profit Analysis: A Pedagogical Note. Issues in Accounting Education, 4(2), 438-453. Retrieved from Business Source Complete database.