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ORIE 3150 class notes CVP

# ORIE 3150 class notes CVP - ORIE 3150 COST-VOLUME-PROFIT...

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ORIE 3150 COST-VOLUME-PROFIT ANALYSIS Many managerial decisions require an analysis of the behavior of costs and profits as a function of the expected volume of sales. In the short run, the costs and prices of a firm's products will, in general, be given. The principal uncertainty, therefore, is not the cost or price of a product, but the quantity that will be sold. Thus, the short-run profitability of a product line will be most sensitive to the volume of sales. Cost-volume-profit (C-V-P) analysis highlights the effect of changes in volume on profitability. Many assumptions are usually made to facilitate the C-V-P analysis, most of which can be relaxed to approximate more realistic or complex situations. To simplify analysis, we adopt the following assumptions (which result in a linear model): 1. Selling price per unit is constant and known 2. Variable cost per unit is constant and known 3. Fixed cost per period of time is constant and known 4. Constant (or zero) inventory levels. This means production volume = sales volume. 5. Production/sales volume is a continuous variable. 6. The analysis is confined to a relevant range of production/sales volume, typically between 0% capacity and 100% capacity. Costs are categorized as: 1. Fixed costs - constant regardless of the output level over the relevant range. 2. Variable costs - constant per unit; thus, total is directly proportional to level of output.

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ORIE 3150 class notes CVP - ORIE 3150 COST-VOLUME-PROFIT...

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