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Unformatted text preview: hout the additional machine. At a volume of 6,250 prints, UDevelop’s proﬁtpproaching College Reading and
2 A will be
Proﬁt ($0.60 $0.36) 6,250 ($1,500 E Developing
$480) ($480)a CollegeLevel Vocabulary which is less than breakeven.
If we are going to have to sell more than 5,000 prints 3 break even, we are going to
to Approaching College Assignments:
have to rent the additional machine. Therefore, to break even, our monthly ﬁxed costs and Following Directions
Reading Textbooks will
be (at least) $1,980 ( $1,500 $480). At this level of ﬁxed costs, the breakeven point is
Breakeven volume Fixed costs
_____________________
Unit contribution margin
$1,980
______
$ 0.24 ✓ Related Resources
See pages 000 to 000
of the Annotated Instructor’s
Edition for general suggestions related to the chapters
in Part One. 8,250
which is less than 10,000 prints. Therefore, UDevelop can break even at a volume of
8,250 prints. If we had found that the new breakeven point was greater than 10,000
prints, we would have repeated the analysis, adding another $480 for an additional
machine. Assumptions and Limitations of CVP Analysis
As with all methods of analysis, CVP analysis relies on certain assumptions and these assumptions might limit the applicability of the results for decision making. It is important
to understand, however, that the limitations are due to the assumptions that the cost analyst
makes; that is, they are not inherent limitations to the method of CVP analysis itself.
cor50782_ch01_001072.indd 1 lan27114_ch03_080109.indd
lan27114_ch03_080109.indd 93 L.O. 5 Understand the
assumptions and
limitations of CVP
analysis. 1 10/5/09 11:09:29 PM 10/22/09 10:34:02 PM REVISED PAGES Part II 94 Cost Analysis and Estimation 1 For example, many people point to the assumptions of constant unit variable cost and
P as R T
constant unit prices for all levels of volumeA important limitations of CVP analysis. As
we saw in the previous section, however, these assumptions are simplifying assumptions
that are made by the analyst. If we know that unit prices are lower for higher volumes, we
can incorporate that relation into the CVP analysis. The result will be a more complicated
relation among costs, volumes, and proﬁts than we have worked with here and the breakeven and target volume formulas will not be as simple as those we have derived. But with
analysis tools such as Microsoft Excel we can model the more complicated relations and
ﬁnd the breakeven point (or points) if they exist.
The lesson from this is that CVP analysis is a tool that the manager can use to help
with decisions. The more important the decision, the more the manager will want to
ensure that the assumptions made are applicable. In addition, if the decisions are sensitive
to the assumptions made (for example, that prices do not depend on volume), the manPreparing and Organizing Yourself
ager should be cautious about depending on CVP analysis without considering alternative
assumptions.
for Success in College Orientation SelfStudy Questions
2. 3. High Desert Campgrounds (HDC)...
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