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An organizations cost structure is the proportion of

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Unformatted text preview: eparing and Organizing Yourself for Success in College Management can use CVP analysis to plan future projects and to help in determining a project’s feasibility. By altering different variables within the equation (e.g., selling price or amount of output), managers are able to perform a what-if analysis (often referred to as sensitivity analysis). L.O. 2. Understand the effect of cost structure on decisions. An organization’s cost structure is the proportion of fixed and variable costs to total costs. Operating leverage is high in firms with a high proportion of fixed costs, a small proportion of variable costs, and the resulting high contribution margin per unit. The higher the firm’s leverage, the higher the degree of the profit’s sensitivity to volume. L.O. 3. Use Microsoft Excel to perform CVP analysis. A spreadsheet program such as Microsoft Excel can be used to perform most CVP analyses. For example, the Goal Seek function of Excel is designed to find values of variables such as volume that set other variables (for example, profit) equal to a selected target value (such as zero). CHAPTE L.O. 4. Incorporate taxes, multiple products, and alternative cost structures into the CVPR S I N P A R T O N E analysis. More complicated relations among costs, volumes, and profits can be analyzed. With income taxes, the target profit, which is after income taxes, has to be converted to 1 Making Yourself Successful in College a target profit before income taxes. With multiple products, an assumption about product mix allows the application of CVP analysis by treating the multiple products as if they are a “basket” of goods. More complicated cost structures, such as step fixedCollege Reading and 2 Approaching costs, can be analyzed by considering costs at different volumes. Developing a College-Level Vocabulary L.O. 5. Understand the assumptions and limitations of CVP analysis. All analysis methods require assumptions that limit the applicability of the results. The cost analyst must understand which assumptions are most important for the decision being made and Assignments: 3 Approaching College consider how sensitive the decision is to the assumptions before relying on CVP Reading Textbooks and Following Directions analysis alone to make a decision. Key Terms break-even point, 84 contribution margin ratio, 84 cost structure, 88 cost-volume-profit (CVP) analysis, 81 margin of safety, 89 margin of safety percentage, 89 operating leverage, 88 profit equation, 82 profit-volume analysis, 87 total contribution margin, 82 unit contribution margin, 82 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. Review Questions Write out the profit equation and describe each term. What are the components of total costs in the profit equation? How does the total contribution margin differ from the gross margin that is often shown on companies’ 1 cor5078...
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