Principles of Accounting III The Phuc Dinh (Mike)

The Phuc Dinh (Mike)

Date: Oct 12th

Class: ACCT 203

Professor David Duback

Chapter 21: COST-VALUE-PROFIT ANALYSIS - Discussion Questions

(Questions: 1, 2, 3, 4, 5, 7, 8, 9, 11, 12, and 14 page 920)

Question 1: What is a variable cost? Identify two variable costs.

Answer: A variable cost is the cost that varies proportionally with the volume of activity. Direct materials
and direct labor are two examples of variable costs.

Question 2: When output volume increases, do variable costs per unit increase, decrease, or stay the same
within the relevant range of activity? Explain.

Answer: Variable costs per unit stay the same when output volume changes. This is because each unit
consumes the same amount of variable costs within the related range of activity.

Question 3: When output volume increases, do fixed costs per unit increase, decrease, or stay the same
within the relevant range of activity? Explain.

Answer: When output volume increases, fixed costs per unit decrease. This is because the total fixed costs
remains the same while it is being divided among more units within the related range of activity.

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Principles of Accounting III The Phuc Dinh (Mike)

Question 4: How is cost-volume-profit analysis useful?

Answer: Cost-volume-profit (CVP) analysis is especially useful in the planning for a business. This
analysis involves predicting the volume of sales activity, the costs to be incurred, revenues to be received,
and profits to be earned. It is also useful in what-if (sensitivity) analysis. CVP analysis also helps managers
of firms analyze what it will take in sales for their firm to break even

Question 5: How do step-wise costs and curvilinear costs differ?

Answer: A step-wise cost remains constant over a limited range of output activity, outside of which it
changes by a lump-sum amount, at that point stays consistent over another restricted range of output
activity, and so on. A curvilinear cost gradually changes in a nonlinear manner in light of changes in sales
volume

Question 7: Define and explain the contribution margin ratio.

Answer:

Contribution margin ratio = Contribution margin / Sales price per unit.

(With Contribution margin = sales - all variable expenses)

This ratio indicates the percentage of each sales dollar that is available to cover a company's fixed costs and
profit.

Question 8: Define and describe contribution margin per unit.

Answer:

Contribution margin per unit = Sales price per unit - Variable costs per unit.

Contribution margin per unit is the dollar amount of a product’s selling price exceeds its variable costs. In
other words, it’s the amount of revenues from the sale of one unit that is left over after the variable costs
for that unit have been paid. That is the amount of money that each unit brings in to pay for fixed costs.
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Principles of Accounting III The Phuc Dinh (Mike)

Question 9: In performing CVP analysis for a manufacturing company, what simplifying assumption is
usually made about the volume of production and the volume of sales?

Answer: A CVP analysis for a manufacturing company is simplified by assuming that the production and
sales volumes are equal. This is the same as assuming no changes in beginning and ending inventory
levels for the period.

Question 11: How does assuming that operating activity occurs within a relevant range affect cost-volume-
profit analysis?

Answer: By assuming a relevant range for operating activity, management can more justifiably assume
either fixed or variable relations between costs and volume, and between revenue and volume. The
assumption also helps limit the consideration of alternative strategies to those that call for volume levels
that fall within the relevant range.

Question 12: List three methods to measure cost behavior.

Answer: Three common methods for measuring cost behavior are: the scatter diagram, the high-low
method, and least-squares regression.

The scatter diagram is the graph of historical data on the y-axis and the volume data on the x-axis. Scatter
plots use historical data to determine a cost behavior.

High-low method is a method for determining cost behavior based on two historical data points: the highest
volume of activity and the lowest volume of activity.

the method of least squares is a statistical method to find a line that best fits a set of data. It is used to break
out the fixed and variable components of a mixed cost.

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