Post 3 - are variable. For longer-term analysis that...

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Katrina Rowsey 7 May 11 9:37 PM MST Cost volume profit analysis (CVP analysis) is one of the most powerful tools that managers have at their command. It helps them understand the interrelationship between cost, volume, and profit in an organization by focusing on interactions among the following five elements: Prices of products Volume or level of activity Per unit variable cost Total fixed cost Mix of product sold Because cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit it is a vital tool in many business decisions. These decisions include, for example, what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire. CVP is a short run, marginal analysis: it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between fixed costs and variable costs, though in the long run all costs
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Unformatted text preview: are variable. For longer-term analysis that considers the entire life-cycle of a product, one therefore often prefers activity-based costing or throughput accounting. Hi Katrina, Cost structure refers to the relative proportion of fixed and variable costs in an organization. An organization often has some latitude in trading off between these two types of costs. For example, fixed investment in automated equipment can reduce variable labor costs. The purpose of management is to reduce the cost by choosing a blend of fixed and variable costs that maximizes the ultimate objective i.e.; profit. In this section we discuss the choice of a cost structure. Which cost structure is better-high variable costs and low fixed costs , or the opposite? No single answer to the question is possible. It depends on specific circumstances that whichever is the ideal structure. Without knowing the future, it is not obvious which cost structure is better. Good post! Jack...
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