Question

6. Mixed costs are costs that a. Mixed costs change but not proportionately with changes in the a. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements. One method that management may use to classify these costs is the b. The high-low method uses the total costs incurred at the and levels of activity. The difference in costs between the high and low levels represents costs, which can change as c. Fixed costs are determined by or

Answer 1

6. Mixed costs are the costs that contain both a variable elemnet abd a fixed element.

a. Mixed Costs change in total but not proportionately with changes in the activity level.

a. For the purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements. One method that management may use to classify these costs is High-Low method.

b. The high-low methoduses the total costs incurred at the high and low levels of activity to classify mixed costs into fixed and variable components. The difference in costs between the high and low levelsrepresents variable costs, since only the variable-cost element can change as activity levels change.

c. Fixed cost are determined by subtracting the total variable costs at either the high or the low activity level from the total cost at that activity level.

B. Cost-volume-profit (CVP)

1. Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a company's profits. CVP analysis is important in management decisions pertaining to:

a. to take decision whether it is profitable to sell the product,

b. Fixed costs allocated to that product,

c. contribution margin ratio is the factor considered for decision making relating to whether the variable costs are high in comparison to the sales or not,

d. decision regarding increasing the sale prices or reducing the variable and fixed costs in order to increase profit.

2. The assumptions underline in each CVP analysis(When these assumptions are not valid, the CVP analysis may be inaccurate):

(1) The behavior of both costs and revenues is linear throughout the relevant range of the activity index.

(2) Costs can be classified accurately as either variable or fixed.

(3) Changes in activity are the only factors that affect costs.

(4) All units produced are sold.

(5) When more than one type of product is sold, the sales mix will remain constant. That is, the percentage that each product represents of total sales will stay the same. Sales mix complicates CVP analysis because different products will have different cost relationships.

3. Contribution Margin is the difference between the sales and the variable cost. It can be expressed as a percentage of sales.

Unit Contribution Margin = selling price per unit less variable cost per unit

Contribution Margin Ratio = unit contribution margin / selling price per unit * 100

C. Break even analysis

1. The breakeven point is the level at which sales revenue is equal to the costs incurred, the company will realize no profit no loss at this point.

2. when taking decision on whether to manufacture a particular product or not, the management must know how many units they need to sell in order to fully recover the costs.

3. a. Mathematical equation:

b. Break even in units = Fixed costs/ unit contribution margin

Break even in dollars = Fixed costs/ contribution margin ratio

c. at the intersection of sales revenue curve and the total cost curve.

D. Target net income

1. Target net income is your desired net income or profit.

a. Target Net Income = Sales - Variable Costs - Fixed Costs.

b. 1. Required sales in dollars = (fixed costs + target profit) / contribution margin ratio

2. Required sales in units = (fixed costs + target profit) / unit contribution margin

3. equals the profit earned .

E. Margin of Safety:

The margin of safety is the difference between actual sales and break-even sales. The margin of safety can be expressed in the percentage of actual sales.

a. Margin of safety in dollars = (Actual sales - Break even sales)

b. Margin of safety ratio = (Actual sales - Break even sales)/ Actual Sales