FOR ESSAYS GURU ONLY 44A

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Cost-Volume-Profit Analysis and Break Even  Some important assumptions in CVP analysis  The most critical assumptions in CVP is that costs are supposedly classified into variable or fixed which is different in a real business environment where they behave differently. It is essential for users of CVP to identify variable costs from fixed costs. It is also assumed that there is a linear relationship within a relevant range of activity over a stated period. The third assumption in CVP analysis is that inventory level does not change from time to time hence all units produced are sold during that time while the fifth assumption is that volume is the only factor that affects variable costs. Finally, it is assumed that the selling price is constant (Garrison et al, 2010).  Significant assumptions and limitations considered when using the information   Break-even point is where the company is not making a profit or loses. The assumptions on the break-even point as per the piece of information given is that there is no change in the price of fuel. It is also assumed that there is no change of in the variable cost per unit of the fuel price despite the change of time period and the relevant range. This means that prices change due to inflation and economic conditions are neglected on top of bulk order discounts and small order premiums. There is also no change in the fixed costs (Weygandt et al, 2010).  Do these assumptions impose serious limitations on the analysis? Why or why not?  These assumptions do not impose severe limitations on analysis. This is because, despite the assumptions, the CVP analysis is a useful tool that could be used in decision making if it is used correctly. This is because the assumptions simplify the process of evaluating the consequence of fluctuations in activity level to costs and eventually to profit. The information provided by CVP helps managers in determining the break-even point hence they are able to set short-term goals such as pricing strategies, production budgets, profit objectives and sales targets (Garrison et al, 2010).        References  Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting.   Issues in Accounting Education, 25(4), 792-793.  Weygandt, J. J., Kimmel, P. D., KIESO, D., & Elias, R. Z. (2010). Accounting principles. Issues in Accounting Education, 25(1), 179-180.

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Hello Christopher – I think you have a good understanding of the relationship of fixed and variable costs to the breakeven point.   Does the change in variable costs present any opportunities for the airline? What options should the company consider given the cost change?
 

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