Chapter 19 – Cost-volume-profit analysis. When you finish this chapter, you should: Explain how fixed, variable, and semivariable costs respond to changes in the volume of business activity; explain how economies of scale can reduce unit costs; prepare a cost-volume-profit graph; compute contribution margin and explain its usefulness;. | Cost-Volume-Profit Analysis Chapter 19 2 CVP analysis is used to answer questions such as: How much must I sell to earn my desired income? How will income be affected if I reduce selling prices to increase sales volume? What will happen to profitability if I expand capacity? Questions Addressed by Cost-Volume-Profit Analysis Number of Local Calls Monthly Basic Telephone Bill Total fixed costs remain unchanged when activity changes. Your monthly basic telephone bill probably does not change when you make more local calls. Total Fixed Cost Number of Local Calls Monthly Basic Telephone Bill per Local Call Fixed costs per unit decline as activity increases. Your average cost per local call decreases as more local calls are made. Fixed Cost Per Unit Minutes Talked Total Long Distance Telephone Bill Total variable costs change when activity changes. Your total long distance telephone bill is based on how many minutes you talk. Total Variable Cost Minutes Talked Per Minute Telephone Charge Variable costs per unit do not change as activity increases. The cost per long distance minute talked is constant. For example, 10 cents per minute. Variable Cost Per Unit Cost Behavior Summary Mixed costs contain a fixed portion that is incurred even when facility is unused, and a variable portion that increases with usage. Example: monthly electric utility charge Fixed service fee Variable charge per kilowatt hour used Mixed Costs Variable Utility Charge Activity (Kilowatt Hours) Total Utility Cost Total mixed cost Fixed Monthly Utility Charge Slope is variable cost per unit of activity. Mixed Costs Activity Cost Total cost remains constant within a narrow range of activity. Stair-Step Costs Activity Cost Total cost increases to a new higher cost for the next higher range of activity. Stair-Step Costs Total Cost Relevant Range A straight line closely (constant unit variable cost) approximates a curvilinear variable cost line within the relevant range. Volume of Output . | Cost-Volume-Profit Analysis Chapter 19 2 CVP analysis is used to answer questions such as: How much must I sell to earn my desired income? How will income be affected if I reduce selling prices to increase sales volume? What will happen to profitability if I expand capacity? Questions Addressed by Cost-Volume-Profit Analysis Number of Local Calls Monthly Basic Telephone Bill Total fixed costs remain unchanged when activity changes. Your monthly basic telephone bill probably does not change when you make more local calls. Total Fixed Cost Number of Local Calls Monthly Basic Telephone Bill per Local Call Fixed costs per unit decline as activity increases. Your average cost per local call decreases as more local calls are made. Fixed Cost Per Unit Minutes Talked Total Long Distance Telephone Bill Total variable costs change when activity changes. Your total long distance telephone bill is based on how many minutes you talk. Total Variable Cost Minutes Talked Per Minute Telephone Charge .
