I Explain How the Traditional Profit and Loss Statement Differs

question 51

Essay

i. Explain how the traditional profit and loss statement differs from the format used in cost volume profit (CVP) analysis.
ii. One of the assumptions underlying CVP analysis is a constant variable cost per unit and fixed costs in total over the relevant range of activity. What are the other assumptions underlying CVP analysis?
iii. The Beetle Company Ltd is experiencing considerable growth and now is able to consider buying raw materials in far larger quantities than a few years ago. For example, one of their primary raw materials may be obtained in bulk purchase lots consisting of three railway wagons as a purchasing unit. The advantage of purchasing in this quantity is that the per-litre cost of this raw material is much cheaper than obtained through purchases of single semitrailer truckloads. In planning for next year, the lower end of possible levels of activity is sufficiently small that the purchase of single semitrailer truckloads would be appropriate. However, at the higher end of the possible levels of activity, purchase in three railway wagons units would be preferable. How could the situation described above be reflected in the CVP analysis? Which of the lines (total revenue, total costs, total fixed costs) would have to be changed and how?

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Definitions:

Classical Theory

An economic theory proposing that free markets can regulate themselves through the relationship of supply and demand without government intervention.

Interest Rate

The percentage charged on a sum of money borrowed or earned on a sum of money invested, typically expressed as an annual percentage rate.

Saving

The portion of income not spent on current consumption but set aside for future use, often put into investments or deposit accounts.

Investment

Allocation of resources, usually money, to generate income or profit, including purchases of bonds, stocks, or property.