When applying a cost volume profit analysis of certain assumptions must be respected which answer is not one of these assumptions?

The assumptions that accountants impose when calculating CVP ratios are sources of possible limitations of the technique. Most CVP analyses are based on the static cost concept.

One assumption is that all costs can be classified into two categories: fixed costs and variable costs. This assumption is not always true because certain costs (e.g., depreciation) cannot be determined exactly. Different depreciation methods may yield different results.

There is also a third category of costs known as semi-variable costs. These costs are also called mixed costs because part of the cost is fixed and part is variable (for example, telephone expenses).

Another assumption is that fixed costs will not change at all levels of sales within the assumed relevant range of activity.

Other assumptions are that selling price per unit remains constant and that variable costs vary in direct proportion to changes in activity (i.e., as a percentage of sales revenue). In the second case, they remain constant.

Additionally, the sales mix is assumed to remain constant if more than one product is sold. Furthermore, the projections are over a short period only.

The limitations and assumptions of CVP analysis mentioned above impair but do not destroy the usefulness of the technique for managers. As such, CVP analysis still serves as a useful profit planning tool.

The main assumptions that accountants make when using cvp analysis are that fixed costs will not change within the relevant range of activity, all costs can be classified into fixed and variable, the selling price per unit will stay constant, and fixed costs remain constant.

What is the semi-variable cost?

A semi-variable cost is a mixed cost because part of the cost is fixed and part is variable (for example, telephone expenses).

What are the limitations of CVP analysis that may impair its usefulness as a planning tool for managers?

The limitations of cvp analysis are its assumptions. This means that it is assumed that the selling price per unit remains constant, variable costs vary in direct proportion to changes in activity, the projections cover only a short period, and the sales mix will remain constant if more than one product is sold.

What is the price per unit assumption?

The selling price per unit assumption means that any changes in activity will not affect selling prices within the relevant range of activity.

What are the assumptions when the sales mix is assumed to remain constant?

The assumptions when the sales mix is assumed to stay constant are that all products of a company will be treated equally, selling prices do not change with changes in product mix, and total variable costs remain constant.

When applying a cost volume profit analysis of certain assumptions must be respected which answer is not one of these assumptions?

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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When applying a cost volume profit analysis of certain assumptions must be respected which answer is not one of these assumptions?

Answer:

Cost-volume-profit (CVP) analysis is useful for break-even analysis and target profit forecasting. CVP allows a company to understand what the expected profits will be for a certain volume of sales given assumptions about sales price, variable costs, and fixed costs. In order for CVP to be accurate, a company must make a series of appropriate assumptions.

  • When applying a cost volume profit analysis of certain assumptions must be respected which answer is not one of these assumptions?

    ano po yng mga questions??

Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that varying levels of costs and volume have on operating profit.

  • Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm's profit.
  • Companies can use CVP to see how many units they need to sell to break even (cover all costs) or reach a certain minimum profit margin.
  • CVP analysis makes several assumptions, including that the sales price, fixed, and variable costs per unit are constant. 

The cost-volume-profit analysis, also commonly known as breakeven analysis, looks to determine the breakeven point for different sales volumes and cost structures, which can be useful for managers making short-term business decisions. CVP analysis makes several assumptions, including that the sales price, fixed and variable costs per unit are constant. Running a CVP analysis involves using several equations for price, cost, and other variables, which it then plots out on an economic graph.

The CVP formula can also calculate the breakeven point. The breakeven point is the number of units that need to be sold or the amount of sales revenue that has to be generated in order to cover the costs required to make the product. The CVP breakeven sales volume formula is:

Breakeven Sales Volume = F C C M where: F C = Fixed costs C M = Contribution margin = Sales − Variable Costs \begin{aligned} &\text{Breakeven Sales Volume}=\frac{FC}{CM} \\ &\textbf{where:}\\ &FC=\text{Fixed costs}\\ &CM=\text{Contribution margin} = \text{Sales} - \text{Variable Costs}\\ \end{aligned} Breakeven Sales Volume=CMFCwhere:FC=Fixed costsCM=Contribution margin=SalesVariable Costs

To use the above formula to find a company's target sales volume, simply add a target profit amount per unit to the fixed-cost component of the formula. This allows you to solve for the target volume based on the assumptions used in the model.

CVP analysis also manages product contribution margin. The contribution margin is the difference between total sales and total variable costs. For a business to be profitable, the contribution margin must exceed total fixed costs. The contribution margin may also be calculated per unit. The unit contribution margin is simply the remainder after the unit variable cost is subtracted from the unit sales price. The contribution margin ratio is determined by dividing the contribution margin by total sales.

The contribution margin is used to determine the breakeven point of sales. By dividing the total fixed costs by the contribution margin ratio, the breakeven point of sales in terms of total dollars may be calculated. For example, a company with $100,000 of fixed costs and a contribution margin of 40% must earn revenue of $250,000 to break even.

Profit may be added to the fixed costs to perform CVP analysis on the desired outcome. For example, if the previous company desired a profit of $50,000, the necessary total sales revenue is found by dividing $150,000 (the sum of fixed costs and desired profit) by the contribution margin of 40%. This example yields a required sales revenue of $375,000.

CVP analysis is only reliable if costs are fixed within a specified production level. All units produced are assumed to be sold, and all fixed costs must be stable in CVP analysis. Another assumption is all changes in expenses occur because of changes in activity level. Semi-variable expenses must be split between expense classifications using the high-low method, scatter plot, or statistical regression.

Cost-volume-profit analysis is used to determine whether there is an economic justification for a product to be manufactured. A target profit margin is added to the breakeven sales volume, which is the number of units that need to be sold in order to cover the costs required to make the product and arrive at the target sales volume needed to generate the desired profit. The decision maker could then compare the product's sales projections to the target sales volume to see if it is worth manufacturing.

The reliability of CVP lies in the assumptions it makes, including that the sales price and the fixed and variable cost per unit are constant. The costs are fixed within a specified production level. All units produced are assumed to be sold, and all fixed costs must be stable. Another assumption is all changes in expenses occur because of changes in activity level. Semi-variable expenses must be split between expense classifications using the high-low method, scatter plot, or statistical regression.

The contribution margin can be stated on a gross or per-unit basis. It represents the incremental money generated for each product/unit sold after deducting the variable portion of the firm's costs. Basically, it shows the portion of sales that helps to cover the company's fixed costs. Any remaining revenue left after covering fixed costs is the profit generated. So, for a business to be profitable, the contribution margin must exceed total fixed costs.