CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS TRUE/FALSE 1. To perform cost-volume-profit analysis, a company must be able to separate costs into fixed and variable components. Answer: True Difficulty: 1 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis 2. Cost-volume-profit analysis may be used for multi-product analysis when the proportion of different products remains constant. Answer: True Difficulty: 1 Objective: 1 Terms to Learn: cost-volume-profit (CVP)
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4 – General Hospital, a not-for-profit acute care facility, has the following cost structure for its inpatient services: Fixed Costs $10,000,000 Variable cost per inpatient day $200 Charge (revenue) per inpatient day $1,000 The hospital expects to have a patient load of 15,000 inpatient days next year. a. Construct the hospital’s base case projected P&L statement. Total revenues ($1,000 x 15,000) $15,000,000 Total variable costs ($200 x 15,000) $ 3,000,000
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Q5 Q6 Cost-Volume-Profit Analysis In Brief Managers need to estimate future revenues, costs, and profits to help them plan and monitor operations. They use cost-volume-profit (CVP) analysis to identify the levels of operating activity needed to avoid losses, achieve targeted profits, plan future operations, and monitor organizational performance. Managers also analyze operational risk as they choose an appropriate cost structure. This Chapter Addresses the Following Questions: What is cost-volume-profit
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Managerial Finance Lecture 7 Cost-‐Volume-‐Profit Analysis & Managerial Decision Making Mario Fonseka FCMA(UK), CGMA (US), Dip. M (UK), FCMA(SL), MBA (USJ), CerGfied Psychometrician (BPS) Saturday, September 20, 14 Cost-Volume-Profit Analysis Saturday, September 20, 14 Cost-Volume-Profit Analysis CVP Analysis is based on the relationship between sales revenue, costs and profit in the short run, in which the output
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relationships among costs, volume and the company’s profit; otherwise known as CVP analysis. CVP analysis stands for Cost-volume-profit analysis which a form of cost accounting in managerial economics. The five essential concepts underlying CVP analysis include: 1. The behavior of both costs and revenues as being linear throughout the relevant range of activity 2. Costs categorized as either fixed or variable costs 3. The only factors that change affecting costs are fluctuation in activity
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allocate costs of direct labor, indirect labor, materials, overhead, and selling / general / administrative accounts on a unit basis for the purpose of accurately costing products and the subsequent control of those costs in managing the production, marketing, purchasing, and administrative functions of the business. For example, at the beginning of a year a company estimates that labor costs should be $2 per unit. Such standards are established either by historical trend analysis of the cost or by
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manufacturing cycle efficiency of this process: MCE = (3+2)/200 = 2.5% Ex23.) a. Total support cost = $250,000 + $80,000 = $330,000 Partner hours = 4 x 2,000 = 8,000 Staff hours = 10 x 2,500 = 25,000 Total hours = 8,000 + 25,000 = 33,000 hours Support rate per hour = $330,000 ÷ 33,000 = $10 b. Total hours = 50 + 200 = 250 Total support cost = 250 x $10 = $2,500 c. Professional support rate per hour = $250,000 ÷ 33,000 = $7.58 (rounded)
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plan that has involved completely changing and over-hauling their pre-existing traditional cost system. The new plan has been installed with the hopes that it will provide more accurate information about their manufacturing cost structure, as well as the costs of supplying individual customers and orders. With this new information, Kanthal plans to redirect its resources to customers with hidden profits and reduce efforts that are focused on customers with hidden losses. The ultimate purpose for
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warehousing and shipping cost is not really correct. The current method is direct method which ignores In term of Shipping and Warehousing cost, low volume products should incur this cost instead of both high volume and low volume products. Because, high volume products are deliveried directly to customer so it does not incur the cost of shipping. The low volume products which are sent to distribution center incurred the cost of shipping and warehousing. However, the cost of shipping and warehousing
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The Behavior Cost Cost-Volume Relationship – how costs behave as the level of activity changes * Variable Cost – are items of cost that vary, in total, directly and proportionately with volume. * Fixed Cost – are items of cost that, in total, do not vary at all with volume * Semi-Variable Cost – are those costs that include a combination of variable and fixed costs items. * Break-Even – total costs equal total revenue * Margin of Safety – amount or ratio by which the current
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