COST-VOLUME PROFIT ANALYSIS
Today the manager is a principal factor in the success or failure of any business enterprise. The primary function of management is to make a profit for the firm. Essentially, profit is generated by effective sales and/or distribution of products or services.
Any decision-making organization actively concerned with profits will find itself involved in the analysis of costs and revenues. Since the firm must first recover its costs before it can make a profit.
There are definite relationships between costs, revenues and profits. There are three levels of activity that are of the greatest concern to the management of any profit-seeking business.
1. Break-even point
The activity level at which the firm has exactly enough revenue to recover all costs.
2. The firm is operating at a loss.
The revenue that is penetrated is not sufficient to recover all costs that have been incurred (Total costs > Total Revenue ).
3. The firm may be operating at profit.
The revenue of the firm completely recovers the costs and has funds left over.
Production (Purchasing) costs
These are costs incurred in making or acquiring products for sale.
These costs are the costs that are associated with the creating of consumer interested in the product. (advertisements)
General Administration Costs
This category includes those costs that are incurred in the day-to-day operating of the firm (salaries, heat).
These are any costs associated with preparing & distributing the product throughout the sales territories (packaging, shipping, expenses of traveling sales representatives).
Revenue = Unit Selling Price X Sales ( in units )
In Decision making process, it is more useful to classify costs...