Unit 8 Cost Volume Profit analysis

Unit 8 Cost Volume Profit analysis - BFA103 FINANCIAL...

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BFA103 FINANCIAL ACCOUNTING AND DECISION MAKING TUTOR NOTES Unit 8– CVP Analysis Discussion questions 7.2 The “ relevant range ” is the range of activity level (units sold or produced) previously experienced by the business, and within which the business expects to continue operating. The business knows at least approximately that within this range all costs behave as assumed by CVP analysis (that is, costs are either fixed or variable, and that its variable costs per unit are constant) so what happens to costs outside the range is irrelevant and can be ignored. A particular cost may appear to be fixed over some range of activity and variable over another range of activity. This does not matter as long as the cost is either clearly fixed or clearly variable within the relevant range of activity within which the business is operating. CVP analysis can be used as long as this is true. 7.9 Operating gearing refers to the amount of fixed costs relative to variable costs in the total costs of some business activity. Where the fixed costs form a relatively high proportion of the total costs, we say that the activity has high operational gearing. Typically, high operating gearing is present in environments where there is a relatively high level of mechanisation (capital intensive businesses). This is because such environments have relatively high fixed costs of depreciation and maintenance, as well as relatively low variable labour costs. 7.11 Relevant costs are those that vary depending on what decision is reached. Costs that do not depend on a decision (for example, because they will be incurred anyway or have already been incurred) are not relevant to a decision. At least in the short term fixed costs are usually not relevant to a decision because it is not possible to alter them and they will have to be met anyway. F ACULTY OF B USINESS UNIVERSITY OF TASMANIA 45
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BFA103 FINANCIAL ACCOUNTING AND DECISION MAKING TUTOR NOTES Application exercises 7.5 (a) Since we know the sales for each month, and the profit for each month, we can calculate the total costs for each month. October November Sales (units of the service) 200 300 Sales ($) 5,000 7,500 Costs (balancing figure) 4,000 5,300 Operating profit ($) 1,000 2,200 The business sold 100 units more in November than October (300 - 200), while total costs increased by $1,300 ($5,300 - $4,000). This increase must relate to variable costs (since fixed costs stay the same) so we know variable costs per unit for the business must be $13
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This note was uploaded on 04/30/2011 for the course ECONOMIC 0053665 taught by Professor Allen during the Spring '10 term at American Baptist.

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Unit 8 Cost Volume Profit analysis - BFA103 FINANCIAL...

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