Acc 561

Week 4 – DQ 1

What are the components of cost–volume–profit (CVP) analysis? How does a CVP income statement help management make decisions?

The components of cost-volume-profit (CVP) analysis are the volume or level of activity; unit selling prices; variable cost per unit; total fixed cost; and sales mix. In addition to the CVP analysis are a CVP income statement, margin of safety, and a break-even analysis. The components correlate within the CVP analysis to display levels of activities of costs and revenues within the organization. Variable cost per unit is formulated by dividing the change in total cost by the high minus low activity level. Fixed costs do not change regardless of changes in activity. Sales mix displays products sold. Also, mixed costs are pertinent within a CVP analysis. These costs are either classified fixed and variable categories. Data is collected on mixed costs at various activity levels to identify the fixed and variable cost components to these mixed costs.

The CVP income statement helps management to make decisions in areas such as classifying variable or fixed costs and compute a contribution margin. Furthermore, this contribution margin per unit and selling price indicates the increase in income as a result of sales increase. Management can also evaluate whether company profitability from determining what amount of sales is needed to cover costs by the unit selling price, unit variable cost, and total fixed costs.

Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2009). Accounting: Tools for Business Decision

Making (3rd ed.). Hoboken, NJ: John Wiley & Sons.