I Explain How Cost Volume Profit (CVP) Analysis Can Be

question 83

Essay

i. Explain how cost volume profit (CVP) analysis can be used by management.
ii. One of the assumptions underlying CVP analysis is a constant sales mix over the relevant range of activity. What are the other assumptions underlying CVP analysis?
iii. The Bygon Company Ltd makes major household appliances such as refrigerators, stoves and dishwashers. Sales are heavily dependent upon the number of housing starts and the level of disposable income. Next year the number of housing starts in Victoria is expected to be the same as this year; however, about two-thirds of these starts will be for rental units compared to a historical average of one-third. The remaining housing starts will be for single-family homes and up market units. Bygon generally makes two levels of each product: the economy model (fully functional, but with few special features) and the prestige model (with the most popular special features). Bygon assumes a product mix of 40 per cent economy and 60 per cent prestige. Describe how the change in the percentage of rental units in housing starts could create a problem with the stable product mix assumption.

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