Week Four Discussion Questions Tammy Jackson Accounting 561 March 26, 2013 Janice Mereba Week Four Discussion Questions Question 1: The components of the cost-volume-profit or CVP analysis has five components. The components are “volume (levels of activity), unit selling price, variable cost per unit, total fixed costs, and sales mix” (Kimmel, etal, 2009, Chapter 19, Illustration 19-1). CVP analysis consists of target net income, income statement, margin of safety, and changes in the work environment. CVP analysis provides a business with a contribution margin.
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The revenue retained after the deduction of variable costs is the business’ contribution margin. “Contribution margin ratio is: the contribution margin per unit divided by the unit selling price. It is the percentage of sales that contributes to a business’ net income” (Kimmel, etal, 2009, Chapter 19). “CVP analysis helps management understand the interrelationship among costs, volume, and profits” (Accounting For Management, 2012, pg. 1). Managers can make decisions on the types of products to sell, and the prices of these products.
Managers can use CVP analysis to determine the best strategy for marketing its products and services. Decisions on the type of facilities to obtain for production can also come from the CVP analysis. Question 2: Break-even analysis is an “analysis to determine the point at which revenue received equals the costs associated with receiving the revenue” (Investopedia, 2013, pg. 1). Break-even analysis only focuses on the costs of sales, making it a supply-side analysis. Break-even analysis does not take into consideration how the demand for a product or service is affected by prices.
The break-even analysis does calculate the margin of safety or the amount of revenues exceeding the business’ break-even point. CVP analysis works with break-even analysis in the following manner: in order to compute the break-even point, the fixed costs, variable costs, and prices must be calculated. The CVP analysis has to be conducted first, prior to computing the break-even analysis. The break-even analysis needs the data from the CVP analysis for correct calculations. To show this is true, here is the formula for calculating the break-even point of a business.
You will notice the components of the CVP analysis required in the equation. “Fixed costs/price – variable costs = Break-even point (units)” (Investopedia, 2013, pg. 1). To achieve a lower break-even point, I will create high-end, attractive products and place services offered into bundles or package deals. I will add up-scale items to my inventory and create better services for my customers. This way, I can raise the profitability of my customers, lowering the number of customers I need to break-even. This is called up-selling.
My products and services may be pricey but I will deliver the best, top-notch quality products, and five star services. References Accounting for Management. (2012). Cost Volume Profit Relationship – (CVP Analysis). Retrieved from: http://accounting4management. com/cost_volume_profit. htm Investopedia. (2013). Break-even Analysis. Retrieved from: http://www. investopedia. com/terms/b/breakevenanalysis. asp Kimmel, P. D. , Weygandt, J. J. , & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed. ). Hoboken, NJ: John Wiley & Sons.
