# week 12 - School of Accounting ACCT 1501: Accounting and...

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School of Accounting ACCT 1501: Accounting and Financial Management 1A Semester 1, 2010 Week 12 Cost Behaviour and CVP Analysis Student Handout Contents: 1. Learning Objectives 2. Tutorial Questions 3. Lecture Materials Lecturer: Trish Strong Blackboard: http://elearning.unsw.edu.au

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1 Introduction and Learning Objectives In this week’s lecturer we will examine how costs have traditionally been treated in a manufacturing environment to support inventory valuation. We will explore how management decision-making can be improved and supported through an understanding of cost behaviour and Cost-Volume-Profit (CVP) analysis. At the end of this class, you should be able to: O1. Identify and give examples of Fixed , Mixed , and Variable Costs O2. Understand CVP concepts including: - Contribution margin - Contribution margin per unit - Contribution margin ratio O3. Identify ways in which CVP analysis can be used in planning and decision making O4. Understand the limitations of CVP analysis O5. Perform CVP analysis to calculate: - Break-Even-Point (BEP) in units and sales dollars - The volume of units that must be sold to achieve a target profit Required Readings Trotman & Gibbons’ M anagement Accounting (MA) Supplement (on Blackboard) Chapter 16, pp.15 - 38
2 Tutorial Questions for Week 12 Preparation Questions Trotman & Gibbins MA Supplement Chapter 16: Problem 16.4 (ignore cost driver column) Problem 16.11 Tutorial Questions Q1: YCube Limited YCube Ltd manufactures electronic games. In 2007, YCube sold 35,000 games at \$40 each. Total costs amounted to \$550,000, of which \$200,000 were considered fixed. In 2008 the company is considering replacing a part that costs \$3.00 with a better part costing \$4.50 per unit. It is estimated that all other variable costs per unit will be the same. The only increase in fixed costs would be caused by the installation of a new machine. This machine would cost \$20,000, and would have a useful life of 5 years and no salvage value. The company uses straight-line depreciation. 1. What was YCube Ltd’s break -even point in number of units in 2007? 2. How many units would the company have had to sell in 2007 to earn a profit of \$140,000? 3. If YCube holds the sales price constant and makes the suggested changes, how many units of product must be sold in 2008 to break even? 4. If the firm holds price constant and makes the suggested changes, how many units of product will the company have to sell in 2008, to make the same net profit as in 2007? 5. If YCube wishes to maintain the same contribution margin ratio in 2008 as it had in 2007, what selling price per unit must it charge to cover the increased direct material cost? Q2: Trotman & Gibbins MA Supplement Problem 16.16 Case Study 1: PowerPooch (Cost behaviour)

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3 PowerPooch needs to make crucial decisions regarding the optimal price of its TTT, and the optimal level of output at that price. To do this it needs to ascertain (a) the nature of its costs and (b) how costs will change with the scale of operations. In other words, it needs to have a solid understanding of cost behaviour.
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## This note was uploaded on 07/25/2011 for the course ACCT 1501 taught by Professor Helen during the Three '09 term at University of New South Wales.

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week 12 - School of Accounting ACCT 1501: Accounting and...

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