Question

In performing short-term CVP analysis for a new product or service, the decision-maker would:

Group of answer choices

Include only allocated fixed costs.

Include only current fixed costs.

Include all current and future fixed costs.

Include only incremental fixed costs.

Include only future fixed costs.

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Answer 1

The cost-volume-profit analysis, also commonly known as break-even analysis, is a short term analysis by manager and it looks to determine the break-even point for different sales volumes and cost structures

The cost-volume-profit analysis makes several assumptions, including that the sales price, fixed costs, and variable cost per unit are constant

Breakeven point for a product formula is as follows : Allocated fixed costs/contribution per unit

In CVP analysis of a new product or service, a decision maker would treat it like a seperate project altogether try and find a breakeven point for that product or service.

Thus the contribuiton from the units sold should offset the allocated fixed overheads to the new product/service.

For eg. a company may produce 2 different products in the same factory, paying factory rent of 100000 (fixed)

and if it tries to introduce a new product,

now the 100000 of rent will now be split between the three products.

So even despite no increase in fixed costs the allocated fixed costs for the new product will increase.(Thus option d is wrong)

And since we are only concerned with the new product/service we will not be bothered with the entire company's fixed costs , thus option b c and e are not true.