MGT223H5 Study Guide - Final Guide: Total Absorption Costing, Fixed Cost, Variable Cost
Document Summary
Discuss five assumptions that underlie breakeven and cost-volume-profit. In a multi-product firm, the sales mix will remain constant. f: there is no inflation, labour productivity, production technology, and market conditions will not change during the period under consideration. What is the importance of the contribution margin in relationship to cvp. Give two (2) examples/combination of factors of how profits can be improved as discussed in class. (5 marks) Cvp analysis seeks the most profitable combination of vc, fc, sp, and sales volume. Profits can sometimes be improved by reducing the cm if fixed costs can be reduced by a greater amount. The way to improve profits is to increase the total cm. Many other combinations of factors are possible: the audited financial statements are prepared using absorption costing (which is still gaap). However, for evaluation of performance variable (direct) costing is a better measure. Absorption costing motivates overproduction because this will increase profits.
