To plan future business activities successfully, managers must know the point of business activity at which total sales revenue is exactly equal to the total costs of generating that revenue. When this point—called the break-even point—is known, managers can more accurately predict the profit or loss that will result from any level of business activity that is expected to occur in the future. By using the concepts employed in break-even analysis, managers may determine the impact of anticipated changes in costs and output levels on profits. The concepts and uses of break-even analysis and related cost-volume-profit (CVP) relationships will be discussed in this chapter.
SUMMARY OF STUDY OBJECTIVES
- Distinguish between variable and fixed costs. Variable costs are costs that vary in total directly and proportionately with changes in the activity index. Fixed costs are costs that remain the same in total regardless of changes in the activity index.
- Explain the significance of the relevant range. The relevant range is the range of activity in which a company expects to operate during a year. It is important in CVP analysis because the behavior of costs is assumed to be linear throughout the relevant range; this means that as activity levels increase (or decrease), costs increase (or decrease) proportionally.
- Explain the concept of mixed costs. Mixed costs increase in total but not proportionately with changes in the activity level. For purposes ...