Cost-Volume Analysis

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Cost-VolumeAnalysis

Cost-VolumeAnalysis

Cost–Volume –Profit Analysis is used to evaluate how changes in costsand level of output affect the operating and net income of a company(Shim,Siegel, and Shim, 2015).Several assumptions are postulated:

  • Constant sales price per unit

  • Constant total fixed costs and variable costs per unit.

  • Everything produced is sold

  • Costs are only affected due to change in activities

  • If an enterprise sells different products, they are sold in the same mix.

Theanalysis maintains that the enterprise`s costs, inclusive ofmanufacturing, selling and administrative expenses, be either groupedinto fixed or variable (Shim,Siegel, and Shim, 2015).

Thelocal movie theater owner needs to perform a CVP analysis andleverage on the best terms for a maximum profit gain. The evaluationshould entail the number of tickets that will be sold in per session.The contribution margin is determined by summing up all the profit orincome before deducting the fixed costs.

Anotheroption that the owner might consider is price differentiation. Themeasure can assist in balancing the levels of income and reduce orcounter costs. However, the logistics may focus on various factorssuch as the economic status of the audience or area or the quality ofservices given. The cost Volume analysis requires that change inactivities affect the costs hence ticket sales may be adjusted (Shim,Siegel, and Shim, 2015).

Variablecosts may include the transport or mileage charges when making tripsto the local grade schools, repair costs, hiring additional equipmentand facilities among others. The additional fixed costs may comethrough wages to hired staff. Incorporating these expenses in the CVPanalysis may lead to changes in the contribution margin (income) andaffect the contribution margin ratio (Income less the costs) (Shim,Siegel, and Shim, 2015)

References

Shim,J., Siegel, J., &amp Shim, A. (2015). Cost-Volume-Profit Analysisand Leverage.&nbspYour Quick Guide To Internal Controls,Financial Reporting, IFRS, Web 2.0, Cloud Computing, And More,219-231. http://dx.doi.org/10.1002/9781119205111.ch10

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