1. CVP Analysis is used to compute a company's breakeven point (BEP).

I have used it in my company for breakeven purposes as well as to do "what if" scenarios in our cost analysis. It is a useful tool. What are the two methods and their components for calculating a company's breakeven point? 1st Approach, The Income Statement shows Total Revenue minus Total Expenses = Net Income => TR TC = NI Break TR down: TR = Price * #units sold =P * N Break TC down: TC = Total Variable Costs + Total Fixed Costs TC = TVC+TFC Now break TVC down: TVC = Variable Cost per unit * # units sold = VC * N Expand the Income Statement equation from TR-TC = NI, to [(P * N) (VC * N)] TFC = NI Rearrange the first expression: (P VC) * N [(P * N) (VC * N)] can be expressed as contribution margin, so CM * N is the same as the first expression. Now, assume that profit (NI) is zero. Then, you are at the break-even point (BEP). The equation is: (CM * N) TFC = 0 at the BEP Move TFC to the other side, to get CM * N = TFC at the BEP The only unknown in this case is N, so rearrange N = TFC/CM 2nd Approach, Lets solve the same problem using the CM ratio. This time, the quantity is not the unknown value. Total Sales Revenue is the unknown value TR * CM ratio = TFC at the BEP Since TR is unknown, rearrange: TR = TFC/CM ratio A short cut to finding additional units to get target income is the incremental method. Once reach you break even, any additional contribution margin goes straight to profit.

2. How might you handle the break-even analysis for multiple product lines? Ideally, a company wants to maximize profits by having the perfect sales mix in which break-even analysis for multiple product lines provide valuable input. Restrictions include Market demand, Capacity constraints, and Time constraints. Sales mix problems use a simplifying assumption that the sales mix is constant. The number of setups best meets the criteria for choosing cost functions because it provides it data on the cost of number of sets ups and allows managers to make financial decisions on how many setups to produce or when to discontinue production. Weighted Average Contribution margin is the method to assess the breakeven analysis of multiple product lines in which Weighted Average Contribution margin is equal to Total Contribution / Total units and Breakeven Point is Fixed Cost / Weighted Average Contribution. The breakeven point in total units can be divided into units of each product in the mix on the basis of percentage. Given a percentage change in TFC, the BEP quantity will change by the same percentage. Reducing TFC makes achievement of the BEP easier. Increasing Price makes achievement of the BEP easier. But, market conditions might make this impossible. Decreasing price can increase volume, making achievement of BEP easier. Decreasing variable costs makes achievement of the BEP easier. 3. What are mixed costs? Can you provide examples of some mixed costs? How do companies measure mixed costs? Mixed costs have two components the fixed piece and the variable piece. Not all costs are purely fixed or purely variable. Many fixed costs are step costs beyond the relevant range such as Dollar Stores expansion with a new store, Samsungs new manufacturing facility, UPS purchase of additional trucks. Many costs are mixed (combine fixed and variable) such as Sales salaries plus commissions. The basic math for mixed costs is: TC = TFC + TVC In which TVC = Amount per cost driver unit * # of Cost driver units For instance, a UPS truck has a mixed cost structure. Depreciation and insurance are fixed; operating costs like gas are variable. The cost driver is miles driven. If VC is $3 per mile driven, and fixed cost per truck is $4,000 per year, you have a cost function (or cost equation): TC = $4,000 + $3 per mile driven

4. It is important for companies to know what their variable and fixed costs are. It is also important for management accountants and production managers to understand the relationship between activity levels and fixed and variable costs. What are some examples of a companys fixed and variable costs? Should a company's activity level decrease, what will happen to total fixed costs? What will happen to total variable costs? CVP (cost-volume-profit) analysis shows the pattern of variable and fixed costs which are reflected in variable costing. Fixed costs are calculated by cost of products and total expenses occurred during the period of financial analysis. As variable and fixed cost are calculated into prices, the prices either increase or decrease, depending on the variable cost. As companies increase or decrease selling prices, sales volume is affected by the behavior of the prices. Therefore, variable cost such as labor and material must be considered by the company because these cost increase as the volume of production increases. On the other hand, fixed costs such as manufacturing overhead, depreciation expense, and fixed utility costs all have an impact on the cost of producing the bulk order. Cost behavior looks at how costs respond to changes in volume or activity. In addition to measuring and evaluating current cost behavior, managers can influence cost behavior through decisions about such factors as product or service attributes, capacity, and technology (Horngren et. al, 2008, p. 97). When looking specifically at costs we try to determine the relationship to a particular cost object. Direct and indirect costs are two costs that are considered in this regard. Indirect costs are a little more difficult to assess but equally important. They are comprised of things like depreciation, facilities rental, or salaries. These types of costs must be divided and distributed to a particular cost object. This allocation base will describe the relationship between an indirect cost and the cost objects it is intended to support (Norfleet, 2007). By looking at these allocated costs, management is able to make clear business decisions. Variable costs are affected by activity in which if there is No Activity, there is no variable cost and if there is much activity, there is much cost. Inventory items are example of variable cost. Fixed costs do not change with activity. Examples are equipment, building, etc. Changing product mix will not impact fixed costs (at least not immediately).