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Cost, Volume, and Profit Questions
Mixed costs are classified in both the variable and fixed costs. Since mixed costs have
elements that will change the outcome of total costs, a good method should be used to
determine accuracy for future costs. A method management might use is the high and
low method. It basically finds the difference between the total costs of high and low
levels to find variable cost per unit. The CVP, or cost-volume-profit analysis is based on
more than just unit costs. It examines the aspects and components on profits. The CVP
analysis includes figuring out volume activity, unit selling prices, variable cost per unit,
total fixed costs, and sales mix. The CVP analysis will take these components and
determine the break even point as well as the profitable point. If the net income is
negative, management will do things to make sure costs can be brought down and its
duty is to bring the net income to its highest. In order to plot the break even point,
management must determine the total costs and total sales. The point where the
measure is the same is when it is unprofitable or known as break even point. By dividing
the number of fixed costs and contribution margin ratio expressed as: fixed costs/
contribution margin ratio would equal break even point in dollars. The contribution
margin ratio is determined by the contribution margin per unit divided by unit selling
price. To determine the contribution margin per unit, subtract the unit variable cost from
the unit selling price. A person can use this formula to graph the loss area, break even
point, and the profit area.