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CVP analysis and cost classifications

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1) What is C-V-P analysis used for? In the process of using C-V-P analysis, what does it mean to "break even"?

2) How can out-of-pocket costs and opportunity costs be applied to your personal financial decisions?

3) Fixed Costs and Variable Costs
Which of the following is an example of a variable cost?
a. Insurance premium for fire insurance on the factory building
b. The salary of the company president
c. Wood used to make custom tables
d. Rent for use of a storage warehouse
e. Depreciation on the factory building

4) Direct and Indirect Costs
Which one of the following statements best explains why companies want to distinguish between direct and indirect costs?
a. To evaluate business segments on the basis of only those costs directly traceable to each
segment
b. To better determine whether a company is a large organization or a small organization
c. To determine the sales prices necessary to break even
d. To better distinguish between variable and fixed costs for each product
e. To better distinguish between materials costs and labor costs

5) Out-of-Pocket Costs and Opportunity Costs
Which one of the following is an example of an opportunity cost?
a. Revenue lost from sale of cakes by deciding to sell only cookies
b. Wages paid to construction workers
c. Materials used to assemble computers
d. Ordering costs related to a customer's special order of guitar strings
e. Rent paid for the use of a factory building

6) Cost Classifications
The following are costs associated with manufacturing firms, merchandising firms, or service
firms:
a. Miscellaneous materials used in production
b. Salesperson's commission in a real estate firm
c. Administrators' salaries for a furniture wholesaler
d. Administrators' salaries for a furniture manufacturer
e. Freight costs associated with acquiring inventories for a grocery store
f. Office manager's salary in a doctor's office
g. Utilities for the corporate offices of a toy manufacturer
h. Line supervisor's salary for a clothing manufacturing firm
i. Training seminar for sales staff of a service firm
j. Fuel used in a trucking firm
k. Paper used at a printing business
l. Oil for machinery at a plastics manufacturing firm
m. Food used at a restaurant
n. Windshields used for a car manufacturer
Classify the costs as (1) product or period; (2) variable or fixed; and (3) for those that are product costs, as direct materials, direct labor, or manufacturing overhead. Write "not applicable (N/A)" if a category doesn't apply.

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Solution Summary

The solution explains the use of CVP analysis and also classifies various costs as fixed or variable, direct or indirect and opportunity and out of pocket costs

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1) What is C-V-P analysis used for? In the process of using
C-V-P analysis, what does it mean to "break even"?

CVP of Cost-Volume-Profit analysis is used to get an idea of breakeven, to see the impact on profits of changing the prices or the volume. To assess the changes in breakeven by changing the mix between the fixed and variable costs. To analyse decision such as whether increase in advertising costs will result in more profits. In short CVP is a systematic method of examining the changes in activity (output) and the changes in total sales revenue, expenses and net profit.

Breakeven implies that there is no operating profit. Total revenues are equal to total operating costs. Beyond breakeven, a firm starts to make profits and each unit sold increases the profit by the contribution margin per unit. As a term break even, gives an indication that the oeprating costs are fully recovered and there is no loss and so we say break even.

2) How can out-of-pocket costs and opportunity costs be
applied to your personal financial decisions?

Out of pocket costs are cash costs incurred in doing some activity and opportunity costs are the income foregone if we take a particular course of action.

In terms of personal financial decisions, suppose we give a party at our house. We could say the costs should be the rent for the place, cost of utensils used or the music system used, cost of food and beverages. Amoung these costs, only the food and beverage cost is out of pocket cost since it requires payment of cash. The other costs do not need cash payment. In taking a decision of how much each guest to pay, we need to consider the out of pocket costs

Opportunity costs would be when you are working and decide to take a break and do ...

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