How does assuming that operating activity occurs within a relevant range affect cost-volume-profit analysis?

How does assuming that operating activity occurs within a relevant range affect cost-volume-profit analysis?

Solutions

Expert Solution

The relationships among costs, volumes and profits are well presented by the cost-volume-profit (CVP) analysis. Costs are classified as variable cost and fixed costs. Variable costs are costs varies with the level of activity. Per unit variable cost is constant. On other hand total fixed costs within the relevant rage is constant. It does not change with the level of activity. The cost-volume-profit (CVP) analysis is based on few assumptions like no change in beginning and ending inventory levels, classification of costs in to variable and fixed costs, constant selling price, impact of activity level on variable costs and existence of Linear relationship within a relevant range. According to CVP analysis cost and revenue are expected to have linear relationships within the relevant range. If the activity is above or below the relevant change, there will be change in the fixed cost. This factor will distort the results of the CPV analysis. The CPV analysis ill offer useful information for decision making and determining break-even point, sales targets, etc. considering any change in activity level within relevant range.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

How does assuming that operating activity occurs within a relevant range affect cost-volume-profit analysis - is...

How does assuming that operating activity occurs within a relevant range affect cost-volume-profit analysis - is this realistic? Be sure to include a discussion of cost behavior patterns and how that impacts this whole process.

CVP analysis The relationship between costs, volume and profit assumes a relevant range. How would a...

CVP analysis The relationship between costs, volume and profit assumes a relevant range. How would a company know if the sales volume they are predicting is considered part of the relevant range?

How do hotels use cost-volume-profit analysis? How does the business benefit from using cost-volume-profit? Does it...

How do hotels use cost-volume-profit analysis? How does the business benefit from using cost-volume-profit? Does it have a low or high degree of operating leverage?

1. If the level of activity increases within relevant range: a. variable cost per unit and...

1. If the level of activity increases within relevant range: a. variable cost per unit and total fixed cost stay the same b. fixed cost per unit and total variable cost increase c. variable cost per unit and total cost increase d. total cost will increase and fixed cost per unit stays same 2. Which of the following statements is incorrect about the Cost-Volume-Profit graph? a. The assumption that volume is the only factor affecting total cost b. The assumption...

Cost-Volume Profit Analysis Guiseppe is operating a restaurant. Fixed costs are 45,000 $. Average cost of...

Cost-Volume Profit Analysis Guiseppe is operating a restaurant. Fixed costs are 45,000 $. Average cost of food and other variable costs are 3.20 $. The average bill is 8$. The income tax rate is 30 %, the net target profit is 105,000 $ (i.e. after income tax). a) How many customers are needed to earn a net target profit of 105,000 $ and to break even? (6 points) b) Calculate the net target profit if you have 15,000 customers! (3...

The subject of the introduction of managerial accounting Learning Activity 2 (LA2): Cost-Volume-Profit Analysis for a...

The subject of the introduction of managerial accounting Learning Activity 2 (LA2): Cost-Volume-Profit Analysis for a Start-up Business In-dass, your Instructor will break you into small groups. In each group, you will think of a proposed business (e., restaurant, retaller, electronics, software provider, etc.) and develop some initial ideas about what considerations need to be taken into account for the company to reach profitability. Answer the following questions in your groups: Describe your business. What product or service will your...

describing and explaining cost behavior, cost volume profit analysis, variable costing for management analysis and how...

describing and explaining cost behavior, cost volume profit analysis, variable costing for management analysis and how they impact a business environment performance

describing and explaining cost behavior, cost volume profit analysis, variable costing for management analysis and how...

describing and explaining cost behavior, cost volume profit analysis, variable costing for management analysis and how they impact a business environment performance

QUESTION ONE: COST–VOLUME–PROFIT (CVP) ANALYSIS (a) Identify the SIX underlying assumptions of cost–volume–profit (CVP) analysis. (b)...

QUESTION ONE: COST–VOLUME–PROFIT (CVP) ANALYSIS (a) Identify the SIX underlying assumptions of cost–volume–profit (CVP) analysis. (b) Select ANY THREE assumptions given in (a) and discuss the difficulties that could arise in CVP analysis if these assumptions do not hold. QUESTION TWO: PUTTING ACCOUNTING DECISIONS IN CONTEXT (a) Describe TWO financial and TWO non-financial performance indicators which may be useful for users of the reports of a public benefit entity (e.g. a museum). (b) If you were a member of the...

Chapter – Cost/Volume/Profit Explain the meaning of fixed, variable, and semi-variable expenses. In a cost/volume/profit analysis,...

Chapter – Cost/Volume/Profit Explain the meaning of fixed, variable, and semi-variable expenses. In a cost/volume/profit analysis, what is the profit number if you are computing a breakeven point (I will allow a one word answer here). What are the limiting assumptions with a cost/volume/profit analysis?

Subjects