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CVP Analysis - Graph and Mixed Costs

1. How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification?

2. "Cost-volume-profit (CVP) analysis is based entirely on unit costs." Do you agree? Explain.

3. Linda Fearn asks your help in constructing a CVP graph. Explain to Linda (a) how the break-even point is plotted, and (b) how the level of activity and dollar sales at the break-even point are determined.

Solution Preview

Mixed costs means cost which has fixed cost and variable cost components.

Fixed cost means cost which is fixed for the particular period say one year .Examples of fixed costs are insurance, parking fee for one year, depreciation of equipment, building . Fixed costs are incurred irrespective of level of production within the standard capacity of the manufacturing unit.

And the variable cost is cost which varies exactly in the same proportion to the level of production in the undertaking.

Now, let us see how the mixed costs can be bifurcated into fixed ...

Solution Summary

The answer describes the meaning of mixed costs, the method by which it can be bifurcated by formula and plotting of CVP graph, and computation of break even point by using CVP graph.

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