COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS

Part 1

Ten Short-Answer Questions

Differentiate between variable and fixed costs. Describe the two major behavior patterns. What if a cost has characteristics of both patterns?

What is meant by the term break-even point? What is a potential benefit of calculating break-even?

Why is the concept of relevant range crucial for understanding fixed-cost behavior?

What is the formula for calculating the break-even point in sales revenue?

What formula is used to solve for the break-even point in units?

How can the break-even formula be altered to calculate the number of units that must be sold to achieve a desired level of income (target income)? Show the formula and explain.

What effect would you expect the mechanization and automation of production processes to have on the break-even point?

Why might a business wish to lower its break-even point? How would it go about lowering the break-even point?

Describe three ideas that can lower the break-even point and include a simple example with numbers.
Part II

Real-World Example
do some research to find a real-world example where cost-volume-profit analysis was applied or could be applied. Information can be found in the news, research papers, and on investment sites. Another option is to locate the financial statements for a company, make some assumptions, and prepare your own break-even analysis from an external point of view. Describe the situation and the results. Show computations when appropriate.

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