Objectives of Cost-VolumeProfit Analysis

Sonu thomas 1116159

Objective 1

Identify how changes in volume affect costs.

Total Variable Cost

Total variable costs change when activity changes.
Total Long Distance Telephone Bill

Your total long distance telephone bill is based on how many minutes you talk.

Minutes Talked

Variable Cost Per Unit

Variable costs per unit do not change as activity increases.
Per Minute Telephone Charge
Minutes Talked

The cost per long distance minute talked is constant. For example, 10 cents per minute.

Variable Costs Example

Consider Grand Canyon Railway. Assume that breakfast costs Grand Canyon Railway $3 per person. If the railroad carries 2,000 passengers, it will spend $6,000 for breakfast services.

Variable Costs Example

Total Variable Costs (thousands)

$24
$18

$12
$6 0 1 2 3 4 5

Volume (Thousands of passengers)

Total Fixed Cost

Total fixed costs remain unchanged when activity changes.
Your monthly basic telephone bill probably does not change when you make more local calls.
Monthly Basic Telephone Bill
Number of Local Calls

Mixed Costs

Contain fixed portion that is incurred even when facility is unused & variable portion that increases with usage. Example: monthly electric utility charge

Fixed service fee Variable charge per kilowatt hour used

Objective 2

Use CVP analysis to compute breakeven point.

Computing Break-Even Point

The unique sales level at which a company earns neither a profit nor incurs a loss.
Sales Variable Costs Fixed Costs = 0

Objective 3

In order to forecast profits accurately, it is essential to ascertain the relationship between cost and profit on one hand and volume on the other.

Objective 4

Cost-volume-profit analysis assist in evaluating performance for the purpose of control

Objective 5

It helps the management in formulating pricing policies by projecting the effect of different price structures on cost and profit.

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