Assumptions of the model include; fixed cost remains the same, and variable costs change proportionately with volume of sale, the variable can be separated into their individual variable and fixed costs, single good or service, sales factor is the only element that affects profit, revenue varies in direct proportionality with volume, no change in stock level and efficiency remains constant. Volume in sales affects the profit which would make higher sales causing higher profits and lower sales-generating lower revenue and eventual profits. 1.2 Components and Variables 1.2.1 Level of Activity The level of activity is the primary element that occurs in a firm for the sole attainment of profit.
An activity that is conducted by a firm includes the number of goods sold and by how much is that good cost. (Garrinson, and Norren, 2005). It also includes the margins this is the cost of producing or buying the good and the selling price of the good. The difference is known as the profit margin, and this is what dictates if the product is viable for sale or not if this difference is high, then the profits are high. 1.2.2 Unit Selling Price Unit selling price is the cost of one item sold when the rate is multiplied by the total amount of units sold it makes up the sales.
(Garrinson, and Norren, 2005)This element is essential in calculating the sales, and it is per unit of the total output. For example, the total sales of ABC company are 300,000 and the items sold are 50000 the unit selling price would be 6. 1.2.3 Variable Cost Variable cost is expenses that change from time to time, this shift in the CVP model is due to the volume of sales.
With an increase in sales, the variable costs increase in such a manner that is proportionate in the same manner. (Durry, Colin 2008)The more the sales, the more the variable costs and vice versa but this is only possible to an absolute limit where sales cannot go any higher. 1.2.4 Fixed Costs A fixed cost is an expense that increases with a decrease or increase in sales; this cost is always in the business, and it is paid for regardless if any transaction occurs.
(Lucey, Terry 2002) An example is a lease on a building or motor vehicle if the firm should pay the (X) amount of cash each month for three years that cost will reflect monthly on the income statement of the company regardless of the volume of sales. 1.2.5 Sales Mix The sales mix is the percentage of the total number of goods or products that an enterprise sells to consumers. (Lucey, Terry 2002) The amount used when the sales of a firm are calculated, and a mean point of this percentage is achieved.
This portion is essential since it gives a rate of efficiency that can be used to calculate for future forecasts of sales or profits that shall be attained. Role of managerial accounting General Managers (GM) and head of departments (HOD) are responsible for decision making in business, one of the questions they have to grapple with when making decisions is the effect of sales volume and product costs to the profits that would be attained. The managers should calculate their sales mix to know what percentage of goods produced are sold; this would enable them to calculate how much volume of sales they will have to attain to reach an individual target of profits.
(Garrinson, R. H., and Norren, E. W. 2005). The cost of making or buying the product is also critical because it dictates the growth of profit margin per the number of goods sold. To make an informed decision of what product they are going to sell is also another responsibility endowed to them, product viability is a key to the success of the business. (Durry, Colin 2008) A product should be able to sell and appeal to customers to continue buying more of it time and time again.
An appeal in a product should be achieved through value addition, advertising, branding, and good quality standards. Managers also have the responsibility of making cost-effective moves; cost reduction is made by reducing the operating expenses. (Lucey, Terry 2002) Cost-effectiveness can be achieved by using modernized equipment, following local trends that are cost-conscious, reducing the fixed and variable costs. The firm's bottlenecks should be realized, and measures are taken to understand them and to find mitigating factors for all of them.
If this is to be done, costs will reduce, and the percentage of profits would also increase.
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