CHAPTER 4 NOTES
cost-volume-profit (CVP) analysis
: the analysis of how costs and profit change when volume changes
: costs that change in proportion to changes in volume or activity. (if activity increases by 10
percent, variable costs are assumed to increase by 10 percent)
Suppose that CodeConnect has variable production costs equal to $91 per bar code reader.
Total variable cost at a production level of 1,000 units (the measure of activity) is equal to $91,000
($91 × 1,000), while total variable cost at 2,000 units is equal to $182,000 ($91 × 2,000)
Change in Cost / Change in Units Produced
Variable Cost per Unit
- 91,000 / 2,000 – 1,000
Fixed Costs :
costs that do not change in response to changes in activity levels
the amount of fixed cost per unit does change with changes in the level of activity. When activity increases, the
amount of fixed cost per unit decreases because the fixed cost is spread over more units.
At 1,000 units, the fixed cost per unit is $94 ($94,000 ÷ 1,000), whereas at 2,000 units, the fixed
cost per unit is only $47 ($94,000 ÷ 2,000).
Discretionary fixed costs
: fixed costs that management can easily change in the short run (advertising,
research and development, and repair and maintenance costs)