chapter 4 sg - Chapter 4 Study Guide Cost-volume-profit...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 4 Study Guide Cost-volume-profit analysis: study of how costs, revenues, and responses change in response to changes in the volume of goods or services provided to customers. Management uses this to assess whether or not the company can sell a product in sufficient volume to cover the costs of manufacturing, or purchasing the product and distributing it. Can help determine selling prices if the quantity of items demanded can be estim- ated. Simplifies reality without taking every little detail into account, therefor CVP has limits of effectiveness and applicability. CVP assumes that the activity driver is the number of units produced and sold. The assumptions of CVP: Selling price remains constant per unit regardless of the volume sold. Total revenue changes in direct proportion to changes in volume of units sold. No volume discounts, no prices changed. Variable cost remains constant per unit regardless of the volume produced and sold. No volume production efficiencies resulting in a lower cost per unit, nor are extremely high or low volume units more expensive to produce and sell. Total variable costs change in direct proportion to changes in the volume of units produced. Fixed Cost remains constant in total regardless of the volume produced and sold throughout the relevant range. The fixed cost portion of the total cost function is repres- ented by a straight line where total fixed cost does not increase or decrease with changes in volume of units produced and sold. For manufacturing firms, the number of units produced equals the number of units sold during the period; for merchandising firms, the number of units purchased equals the number of units sold during the period. There are no changes in the inventory level from the beginning to the end of the period. The volume number used for cost determin- ation is the same volume number used for revenue determination. If more than one type of product is sold, the
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/18/2011 for the course ACCT 2101 taught by Professor Clark during the Fall '10 term at Georgia State.

Page1 / 4

chapter 4 sg - Chapter 4 Study Guide Cost-volume-profit...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online