Therefore to break even our monthly xed costs and

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Unformatted text preview: hout the additional machine. At a volume of 6,250 prints, U-Develop’s profitpproaching College Reading and 2 A will be Profit ($0.60 $0.36) 6,250 ($1,500 E Developing $480) ($480)a College-Level 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 break-even point is Break-even 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, U-Develop can break even at a volume of 8,250 prints. If we had found that the new break-even 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_001-072.indd 1 lan27114_ch03_080-109.indd lan27114_ch03_080-109.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 break-even 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 Self-Study Questions 2. 3. High Desert Campgrounds (HDC)...
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