Alternative Income Statements

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The cost structure of an organization is its mix of fixed and variable costs. How can CVP analysis be used to evaluate decisions that affect the cost structure of an organization? In your organization, does management lean toward choosing fixed or variable costs when considering change? Why?

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CVP analysis is cost-volume-profit analysis. It is a way to determine the impact of changes in cost and volume on operating and net income of a business. It examines inter-relationship between, sales, expenses, production volume, selling prices and profits etc. CVP analysis is used for making important decisions. CVP analysis is used to evaluate decisions that affect the cost structure of an organization. The cost structure is the relative proportion of fixed and variable cost that a company incurs. This can be done by measuring the breakeven point for cost and volume. To evaluate this it requires fixed cost, sales mix, and weighted average contribution margin. For example, if a company makes different components of cars the cost of 20 cars is $500 and they sell each at $100 so for getting breakeven they need to sell 5 units. CVP analysis has some assumptions like sale price per unit, total fixed cost and variable cost per unit will remain constant. Every unit produce is sold, if more than one product is sold then it must be sold in the same mix and cost is affected due to only change in activities. If the maximum sale is of $10,000 then potential profit will be $9500. In my organization, the management would lean towards choosing fixed cost while considering a change. It is a manufacturing company and it used a high proportion of fixed cost in its automated manufacturing plant while where it requires manual work, in a direct labor-intensive plant it has a high proportion of the variable cost. The cost structure affects the profit of business in response to changes in sales volume. Those firms which have a greater proportion of fixed cost will have a greater impact on profit and they have a high contribution margin ratio.

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