Exercise-4 (Degree of operating leverage, contribution margin income statement) · Exercise-5 (CM ratio, break-even analysis, target profit analysis, margin of. Cost-volume-profit (CVP) analysis examines the behavior of total revenues, Three methods to express CVP relationships are the equation method, the. Describe the impact of automation on fixed-variable cost relationships. This chapter discusses the use of cost-volume-profit analysis for decision making and Now turn to “Answers to self-test” at the end of the book to check your answers.
Cost-volume-profit Analysis and Decision Making in the Manufacturing Industries of Nigeria
It is also known as break-even analysis. Finally this study is aimed at examining the effect of costvolume-profit analysis on decision making process of some selected manufacturing industries in Nigeria. The major problem encountered by manufacturing industries when cost-volume-profit analysis stands as a basis for decision making is managerial inefficiency and this includes ignorance of this concept ie inability of the management to employ it in their decision making and also not knowing the importance of costvolume- profit analysis.
Manufacturing industries are not relevant in their decision making process. Most manufacturing industries in Nigeria do not determine the extent to which cost-volumeprofit analysis affect their various decisions.
Manufacturing industries is faced with the problem of how to make use of the available scare resources in order to achieve the objective of profit maximization. To what extent is cost- volume-profit analysis considered relevant in the decision making process of manufacturing industries?
To what extent does the application of cost-volume profit analysis technique in decision making process enhance managerial efficiency of manufacturing industries? To what extent does cost-volume-profit analysis affect the various decisions of manufacturing industries? To what extent does each of the identified approaches to cost volume profit analysis is being adopted in manufacturing industries?
What is the decision making opportunities of the selected industries based on their reorder level and economic order quantity? Conceptual Framework Adenji states that cost-volume-profit analysis are predetermined costs, target costs or carefully pre planned costs which management endeavors to achieve with a view to establishing or attaining maximum efficiency in the production process.
According to him, cost-volume-profit analysis is cost plans relating to a single cost unit.
Because cost-volumeprofitanalysis purports to be what cost should be, any deviation represents a measure of performance. The predetermined costs are known as cost-volume-profit analysis and the difference between the cost-volume-profit analysis and actual costs are known as a variance.
Drury defines cost-volume-profit analysis as predetermined cost; they are cost that should be marred under efficient operating conditions.
The cost volumeprofit analysis may be determined on a number of bases. The main uses of cost-volume-profit analysis are in performance measurement, control, stock valuation and in the establishment of selling prices.
Cost-volume-profit analysis is a target cost which should be attained. The buildup of cost-volume-profit analysis is based on sound technical and engineering studies, knowing the production methods and layouts, work studies and work measurement, materials specification and wage and material price projections.
A cost-volume-profit analysis is not an average of previous costs. They are likely to contain the results of past inefficiencies and mistakes. Furthermore, changes in methods, technology and costs make comparison with the past of doubtful value for control purposes. In order to assist the decision making of manufacturing industries in cost-volume-profit analysis control, the cost-volume profit analysis system must first of all indicate what is attainable by efficient performance and then highlight any area where attainable efficiency is not being achieved.
Cost- volume- profit analysis, according to Glautier et alis the systematic examination of the inter relationship between selling prices, sales and production volume, cost, expenses and profits.
Costvolume-profit analysis will also be employed on making vita and reasonable decision when a firm is faced with managerial problems which have cost volume and profit implications. Costvolume- profit analysis according to Hilton R.
The relationship between a products revenue and cost function expressed within the cost-volume-profit analysis are used to evaluate the financial implication of a wide range of strategic and operational decisions.
Total fixed costs are constant. Everything produced is sold. Costs are only affected because activity changes. If a company sells more than one product, they are sold in the same mix.
CVP analysis requires that all the company's costs, including manufacturing, selling, and administrative costs, be identified as variable or fixed.
Contribution margin and contribution margin ratio Key calculations when using CVP analysis are the contribution margin and the contribution margin ratio.
The contribution margin represents the amount of income or profit the company made before deducting its fixed costs. Said another way, it is the amount of sales dollars available to cover or contribute to fixed costs.
When calculated as a ratio, it is the percent of sales dollars available to cover fixed costs. Once fixed costs are covered, the next dollar of sales results in the company having income.
The contribution margin is sales revenue minus all variable costs. It may be calculated using dollars or on a per unit basis. If The Three M's, Inc. It can be calculated using either the contribution margin in dollars or the contribution margin per unit. To calculate the contribution margin ratio, the contribution margin is divided by the sales or revenues amount.