Question

(a) How can Cost Volume Profit [CVP] techniques be used in supporting a company’s sustainability efforts? How might CVP be a barrier to sustainability efforts?

(b) Why could a manager be justified in ignoring fixed costs when making a decision about a special order? When would fixed costs be relevant when making a decision about a special order?

Answer 1

(a). CVP analysis examines the interaction of a firm's sales volume, selling price, cost structure, and profitability. It is a powerful tool in making managerial decisions including marketing, production, investment, and financing decisions.

• How many units of its products must a firm sell to break even?

• How many units of its products must a firm sell to earn a certain amount of profit?

• Should a firm invest in highly automated machinery and reduce its labor force?

• Should a firm advertise more to improve its sales?

So many cause CVP be a barrier to sustainability efforts?

• If selling price is variable.

• If costs are unlinear and can't be divided into variable and fixed elements.

• If in multi-product companies, sales mix is variable

•If in manufacturing companies, inventories change.

(b). A special order requires you to make decisions using relevant information. You decide which costs and revenue are relevant. Based on your analysis, you make a decision designed to maximize your profit.

when making a decision about a special order. we can a manager be justified in ignoring fixed costs.

Keep the following points in mind when you’re considering special orders:

• Because you are already in business to produce other goods, assume that your fixed costs are being paid for from your regular production. Assume that you’ve received other orders, completed work, and billed clients. That revenue allows you to cover fixed costs — like a building lease payment or insurance premiums.

• A special order can be filled only if you have excess capacity. You must have the ability to perform the work.

• Get ready for this: You can accept a lower sales price for a special order and still be profitable. The fixed costs have already been paid for with earlier production. They are past (sunk) costs, so you do not need to worry about covering them with your special-order revenue.

Variable costs are a part of your special-order calculation. Variable costs are almost always relevant to a special order.