Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

What are the CVP assumptions?

Short Answer

Expert verified

Answer

When the volume of a product changes, the price per unit does not change.

Step by step solution

01

CVP assumptions

CVP analysis assumes the following:

  1. The price per unit does not change as volume changes.
  2. Managers can classify each cost as variable, fixed, or mixed.
  3. The only factor that affects total costs is a change in volume, which increases or decreases total variable and mixed costs.
  4. Total fixed costs do not change.
  5. There are no changes in inventory levels.
02

Limitation of assumptions

The above assumptions do not meet all business conditions and may not be relevant for the businesses.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question: What is target profit?

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Expected sales are 200 tables per month.

17. Calculate the margin of safety in units.

18. Determine the degree of operating leverage. Use expected sales.

19. The company begins manufacturing wood chairs to match the tables. Chairs sell for \)50 each and have variable costs of \(30. The new production process increases fixed costs to \)7,000 per month. The expected sales mix is one table for every four chairs. Calculate the breakeven point in units for each product.

Analyzing a cost-volume-profit graph

Nolan Rouse is considering starting a Web-based educational business, e-Prep MBA. He plans to offer a short-course review of accounting for students entering MBA programs. The materials would be available on a password-protected Web site; students would complete the course through self-study. Rouse would have to grade the course assignments, but most of the work would be in developing the course materials, setting up the site, and marketing. Unfortunately, Rouseโ€™s hard drive crashed before he finished his financial analysis. However, he did recover the following partial CVP chart:

Requirements

1. Label each axis, the sales revenue line, the total costs line, the fixed costs line, the operating income area, and the breakeven point.

2. If Rouse attracts 300 students to take the course, will the venture be profitable? Explain your answer.

3. What are the breakeven sales in students and dollars?

Calculating breakeven point for two products, margin of safety, andoperating leverage

The contribution margin income statement of Delectable Donuts for May 2018follows:

DELECTABLE DONUTS

Contribution Margin Income Statement

Month Ended May 31, 2018

Net Sales Revenue

\(125,000

Variable cost

Cost of goods sold

\)32,100

Selling cost

17,400

Administrative cost

500

\(50,000

Contribution Margin

\)75,000

Fixed cost

Selling cost

\(37,800

Administrative cost

12,600

\)50,400

Operating income

\(24,600

Delectable sells five dozen plain donuts for every dozen custard-filled donuts. A dozenplain donuts sells for \)4.00, with a variable cost of \(1.60 per dozen. A dozen custardfilled donuts sells for \)8.00, with a variable cost of $3.20 per dozen.

Requirements

1. Calculate the weighted-average contribution margin.

2. Determine Delectableโ€™s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution nmargin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.

3. Compute Delectableโ€™s margin of safety in dollars for May 2018.

4. Compute the degree of operating leverage for Delectable Donuts. Estimate thenew operating income if total sales increase by 20%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar.Assume the sales mix remains unchanged.)

5. Prove your answer to Requirement 4 by preparing a contribution marginincome statement with a 20% increase in total sales. (The sales mix remainsunchanged.)

What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.

See all solutions

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free