Short-term Decision Making: Cost-Volume-Profit Analysis

Question 1

What are mixed costs

Answer 1

Costs that have a mixed behaviour, semi variable ad semi fixed foe example employee salary could be fixed wage + variable commission

Question 2

What is the linearity assumption and the relevant range

Answer 2

We can assume that within a level of activity, we have a linear relationship

However have to be aware of where the relevant range is, for example discounts may be given based on how many more units over a specific amount

Question 3

Mixed costs formula

Answer 3

Fixed costs + variable costs x quantity of units produced

Starts halfway up the Y axis as we have fixed costs already

Question 4

Analysis of mixed costs: How to do the High-Low Method

Answer 4

Look at HIGHEST and LOWEST activities (units) if lots.

1) Find the change in units and cost for both levels
2) Variable element = cost/units

Fixed element = total cost - (variable cost x units) –> you can choose whatever activity level as both should give same answer

Question 5

How to do do formula and work out etching cost

Answer 5

Formula = Y = a + bX

a = fixed costs
b= variable cost
x = units

Input units into the formula to work out etching cost

Question 6

What is cost-volume profit analysis

Answer 6

Helps managers understand the interrelationships between cost, volume and profit in an organisation

Question 7

Profit and operating profit formula

Answer 7

Profit = total revenues (price x quantity) - total costs

Operating profit = (selling price - variable costs per unit) x volume of activity - total fixed costs

Question 8

What is an assumption in CVP analysis

Answer 8

That we make the same quantity of units that we sell