Question

Q 1 In your opinion, how analyzing cost behaviour is useful?

Discuss why contribution margin and break-even can be used by managers?

Answer the two questions using graphs in your analysis.

Answer 1

• Analysing cost behaviour help managers in predicting the future costs.This will help in deciding the price of products.
• Analysing cost behaviour also help managers in managing product portfolio. It helps in deciding which product requires expansion and which product to discontinue.
• In a situation of capacity constraint, cost behaviour analysis helps in allocation of capacities to products.
• Cost behaviour analysis helps in capital budgeting decision of launching new products.
• Cost behaviour analysis helps in deciding process strategy and make or buy decisions

Contribution margin and break even can be used by managers in deciding a new product launch. If the demand is below break even point or if there is not enough safety margin, the project for new product is not accepted.

In case of constraint in capacity or other resources, the limited resources are allocated to the product having maximum contribution per unit of resources used.

Assumethe cost equation is C=F+V* N

C=Total cost

F= fixed cost=$100000

V=Variable cost per unit=$100

S=Sales Price per unit=$200

Contribution per unit=(200-100)=$100

Break even point in units=100000/100=1000

Break even sales=$200,000

Any new product having sales forecast below 1000 unit will not be accepted

This can be shown in the following Cost Volume Profit chart:

N	S=N*200	C=100000+100*N	P=S-C
Volume in number of units	Sales	Cost	Profit
100	20000	110000	-90000
200	40000	120000	-80000
300	60000	130000	-70000
400	80000	140000	-60000
500	100000	150000	-50000
600	120000	160000	-40000
700	140000	170000	-30000
800	160000	180000	-20000
900	180000	190000	-10000
1000	200000	200000	0
1100	220000	210000	10000
1200	240000	220000	20000
1300	260000	230000	30000
1400	280000	240000	40000
1500	300000	250000	50000
1600	320000	260000	60000
1700	340000	270000	70000
1800	360000	280000	80000
1900	380000	290000	90000
2000	400000	300000	100000