Unit 5: Cost-Volume-Profit
(CVP) Analysis Module 9 - CVP
Analysis – Basics with verified
solutions
Variable costs
Costs that change in total in direct proportion to changes
in activity level
Example would be food materials cost in a restaurant
Cost-volume-profit analysis (CVP)
Techniques for determining how changes in revenue,
costs, and level of activity affect the profitability of an
organization
CVP answers the question
How much do I need to sell to earn a proft
Cost behavior
The way a cost is affected by changes in activity levels
Fixed costs
Costs that remain constant in total, regardless of activity
level, at least over a certain range of activity
Example would be cost of a rent
Key factors involved in CVP analysis
-revenues from the sales prices charged for goods and
services
-fixed and variable costs
-sales volume
-mix of products
-resulting profits
, Relevant range
The range of operating level, or volume of activity, over
which the relationship between total costs (variable plus
fixed) and activity level is approximately linear
Why are variable costs applicable only with relevant
ranges
Because if activity increases or decreases significantly,
cost relationships will probably change. If production
volume sours factors like overtime work and bulk
purchase discounts may cause direct labor and materials
costs per unit to change
Economies of scale
A proportionate saving in costs gained by an increased
level of production. Similarly, as the level of activity
decreases, the fixed cost per unit increases
Stepped costs
Costs that change in total in stairstep fashion (in large
amounts) with changes in volume of activity
Mixed costs
Costs that contain both variable and fixed costs
components
What is the purpose of using CVP analysis?
To study the interrelationships among revenues, costs,
levels of activity, and profits
What is a mixed cost?
A cost that includes both a fixed portion and a variable
portion
What kind of cost is property taxes on a factory building?
Fixed cost
(CVP) Analysis Module 9 - CVP
Analysis – Basics with verified
solutions
Variable costs
Costs that change in total in direct proportion to changes
in activity level
Example would be food materials cost in a restaurant
Cost-volume-profit analysis (CVP)
Techniques for determining how changes in revenue,
costs, and level of activity affect the profitability of an
organization
CVP answers the question
How much do I need to sell to earn a proft
Cost behavior
The way a cost is affected by changes in activity levels
Fixed costs
Costs that remain constant in total, regardless of activity
level, at least over a certain range of activity
Example would be cost of a rent
Key factors involved in CVP analysis
-revenues from the sales prices charged for goods and
services
-fixed and variable costs
-sales volume
-mix of products
-resulting profits
, Relevant range
The range of operating level, or volume of activity, over
which the relationship between total costs (variable plus
fixed) and activity level is approximately linear
Why are variable costs applicable only with relevant
ranges
Because if activity increases or decreases significantly,
cost relationships will probably change. If production
volume sours factors like overtime work and bulk
purchase discounts may cause direct labor and materials
costs per unit to change
Economies of scale
A proportionate saving in costs gained by an increased
level of production. Similarly, as the level of activity
decreases, the fixed cost per unit increases
Stepped costs
Costs that change in total in stairstep fashion (in large
amounts) with changes in volume of activity
Mixed costs
Costs that contain both variable and fixed costs
components
What is the purpose of using CVP analysis?
To study the interrelationships among revenues, costs,
levels of activity, and profits
What is a mixed cost?
A cost that includes both a fixed portion and a variable
portion
What kind of cost is property taxes on a factory building?
Fixed cost
