Question

7. What is sensitivity analysis?
8. What are 3 ways in that CVP analysis can be used by managers to make decisions?
9. How does variable costing differ from absorption costing?
10. If units produced = units sold, is the net income under variable costing or absorption costing greater?
11. If units produced> units sold, is the net income under variable costing or absorption costing greater?
12. If units produced< units sold, is the net income under variable costing or absorption costing greater?

Answer 1

7. A sensitivity analysis determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions. In other words, sensitivity analyses study how various sources of uncertainty in a mathematical model contribute to the model's overall uncertainty. This technique is used within specific boundaries that depend on one or more input variables.

8. three ways in which cvp analysis can help managers in decision making

a)CVP analysis can help companies determine their contribution margin, which is the amount remaining from sales revenue after all variable expenses have been deducted. The amount that remains is first used to cover fixed costs, and whatever remains afterward is considered profit.

b) CVP analysis provides a detailed snapshot of company activity. This includes everything from the costs needed to produce a product to the amount of the product produced. This helps managers determine, very specifically, what the future will hold if variables are altered.

c)CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company.

9) Difference between variable costing and absorption costing

a) Costs : Under VC only variable costs directly incurred in production are included whereas Absorption costing includes both variable costs and fixed costs related to production.

b) Alternative names: VC is also known as direct costing and AC is known as full costing.

c) Internal/external use : VC IS GENERALLY USED FOR INTERNAL REPORTING PURPOSES whereas AC is used for reporting to the external stakeholders as well as for filing it returns.

d) Relevance: VC is used for comparing the profitability of different product lines whereas AC is used for calculating per unit cost based on all costs.

10)If units produced = units sold, is the net income under variable costing or absorption costing is equal.

11) If units produced> units sold, is the net income under absorption costing is greater.

12) If units produced< units sold, is the net income under variable costing WILL BE GREATER