Financial Accounting: CVP Analysis, Fixed and Variable Costs, Break Even Point Calculation

This assignment covers the underlying assumptions of CVP analysis, fixed and variable costs, and break even point calculation. It also includes examples and references.

Financial Accounting

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By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
In the given assignment, three questions have been solved. Firstly the underlying assumptions of
cost benefit analysis has been discussed about. Secondly, the comparison between the fixed and
variable costs has been done using examples. In the third and the fourth question, the the break
even point has been calculated for the independent given business situations.
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Contents
Introduction.................................................................................................................................................4
Summarizing the process, that Deb Young used to develop a balanced scorecard for GPI.........................5
Identifying advantages and disadvantages of balanced scorecard at GPI...................................................7
Developing proposed balanced scorecard in presenting Board of Directors at next meeting.....................9
Critical success factors included in the balanced scorecard......................................................................10
Conclusion.................................................................................................................................................12
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Question 1: Underlying assumptions of CVP analysis
Cost volume profit analysis may be defined as the change in the operating income and the net
profit due to the change in the costs and the volume of operations. The change in profit can be
due to the change in the sales, costs or even the selling prices. Furthermore, there can be a
change in both the variable as well as fixed costs.
The cost volume profit analysis is based on a number of underlying assumptions which have
been enlisted below:
1. The costs behaviour can be classified into fixed and variable costs.
2. The behaviour of the cost is assumed to be constant.
3. Fixed costs often remain fixed or constant over the given period of time or the given level
of activity (Alexander, 2016).
4. The cost per unit and the price per unit remains constant over the period of time and the
relevant range.
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5. For entities, which are selling multiple products, the sales mix amongst the products
remains same throughout.
6. The units being sold is equal to the units being produced, thus, there is no ending
inventory.
Question 2: Fixed and variable costs
There can be different kinds of costs and these costs can be categorised in to fixed and variable
costs. Fixed costs are those costs which do not change with th level of activity or within a given
time frame, i.e., irrrespective of the level of activity, the fixed costs remain constant (Linden &
Freeman, 2017).
The total fixed cost remains constant whereas the fixed cost per unit decreases with the increase
in the number of units. On the other hand, variable costs are cost which changes with the level of
activity. In case of the variable costs, the variable costs per unit remains constant but the total
variable costs changes with the increase or decrease in the number of goods and services
produced or rendered (Jefferson, 2017).
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Some of the examples of the fixed costs include rent of the building, salary of the employee, the
depreciation expenses, the insurance cost. All these costs do not increase or decrease when the
number of units produced are lowered or increased, thus they are fixed costs.
On the other hand, variable costs are like direct material costs, the labour costs, wages,
commission, packing expenses, etc which increases when the number of units sold or produced
are increased or decreased.
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Question 3: Calculation of break even point in units
Following is the formula for the calculation of the break even point in units.
Break even point (units) = Total Fixed costs / (contribution per unit)
Sl. No. Particulars Amount ($)
a. Selling price per unit 9
Less: Variable cost per unit 3
Contribution per unit 6
Total fixed costs 85,500
Break even point (units) 14,250
b. Selling price per unit 20
Less: Variable cost per unit 10
Contribution per unit 10
Total fixed costs 126,400
Break even point (units) 12,640
c. Selling price per unit 23
Less: Variable cost per unit 20
Contribution per unit 3
Total fixed costs 81,300
Break even point (units) 27,100
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Question 4: Calculation of break even number of coaching sessions
In the given case, Nicholas Cash has received an offer from Roger Novac who is one of the top
ranked Australian player and he wishes to have 50 private coaching sessions this season with
Nicholas over a period of 2 months (Choy, 2018). In case the same is accepted, then Nicholas is
to hire an additional tennis ground costing $ 14000 for 2 months.
The calculation for the break even coaching session is shown below:
Particulars
Amount
($) Amount ($)
Coaching session fees 600
Less: Variable cost per unit
Cost of tennis racket and ger per session 180
Cost of tennis balls 70 250
Contribution per unit 350
Total fixed costs (tennis court hire fees) 14,000
Break even point (no. of coaching sessions) 40
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References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland .
Technological Forecasting and Social Change, 353-354.
Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1
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