Temple Variable and Fixed Costs & Interaction with Contribution Margin Concepts Questions I need to write an answer to this discussion answer. Here is the | Course Hero

Temple Variable and Fixed Costs & Interaction with Contribution Margin Concepts Questions I need to write an answer to this discussion answer.

Here is the discussion:

Correctly identifying fixed and variable costs are critical when using Cost-Volume-Profit (CVP) analysis. CVP analysis helps managers estimate how profits are affected by changes in selling prices, sales volume, unit variable costs, total fixed costs, or product mix (Noreen, Brewer, & Garrison, 2020). Break-even analysis, target profit analysis, and margin of safety calculations require the use of a company’s contribution margin (Noreen et al, 2020). The contribution margin equals total sales revenue minus total variable expenses and is the foundation for performing CVP analysis. CVP analysis requires the distinction between variable and fixed costs (Noreen et al, 2020).

A variable cost changes proportionally based on the level of activity while a fixed cost remains constant regardless of activity level (Noreen et al, 2020). Correct identification of these costs directly impacts the results of the CVP analysis. If costs are incorrectly classified, the contribution margin calculation will not be correct. If the contribution margin is not accurate, managers could make ill-informed decisions regarding break-even point, target profits, and margin of safety. If variable costs are included in fixed costs, contribution margin would be overstated. Likewise, if fixed costs are included in variable costs, contribution margin would be understated.

Break-even analysis, target profit analysis, and the margin of safety can be calculated in dollars or units. For example, managers can determine how many units are required to break-even or how many sales dollars are required to break-even. CVP analysis based on units is more complex if the company sells multiple products, in which case, the sales mix must be assumed to be constant (Noreen et al, 2020). However, the ability to use units or sales in CVP analysis could be beneficial to managers of all businesses.

References

Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2020). Managerial accounting for managers (4th ed.). McGraw-Hill Education.