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Cost-volume-profit analysisPowerPoint Presentation

Cost-volume-profit analysis

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Presentation Transcript

You should be able to:

Distinguish between fixed costs and variable costs

Use knowledge of this distinction to deduce the break-even point for some activity

Make decisions on the use of space capacity, using knowledge of the relationship between fixed and variable costs

Make decisions about the acceptance or rejection of a contract or activity, based on knowledge of the relationship between fixed and variable costs

Cost-volume-profit analysis

Costs may be broadly classified as

Those that stay fixed (the same) when changes occur to the volume of activity

Fixed

Those that vary according to the volume of activity

Variable

The behaviour of costs

F

0

Volume of activity (units of output)

Graph of fixed cost(s) against the volume of activity

Graph of electricity cost against the volume of activity

The slope of this line gives the variable cost per unit of activity

Electricity cost (£)

Fixed costelement

0

Volume of activity

Total cost

Variable costs

F

Fixed costs

0

Volume of activity (units of output)

Graph of total cost against the volume of activity

Cost (£)

Break-even point

Total cost

Variable costs

F

Fixed costs

0

Volume of activity (units of output)

Break-even chart

5

Totalcosts

Totalrevenue

Cost (£000)

4

3

Break-evenpoint

2

1

Fixed costs

0

100

200

300

400

500

Volume of activity (number of baskets)

Break-even chart for Cottage Industries’ basket-making without the machine

6

Cost (£000)

5

Totalrevenue

Totalcosts

4

3

Break-evenpoint

2

1

Fixed costs

0

100

200

300

400

500

Volume of activity (number of baskets)

Break-even chart for Cottage Industries’ basket-making with the machine

The effect of operating gearing

Profit (£)

Break-even point

Profit

0

Volume of activity

Fixed cost

Loss

Loss (£)

Profit-volume chart

Three general problems

Non-linear relationships

Stepped fixed costs

Multi-product businesses

Weaknesses of break-even analysis

Can be used for the following short-term decisions:

Accepting/rejecting special contracts

The most effective use of scarce resources

Make-or-buy decisions

Closing or continuation decisions

Marginal analysis

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