Cost, Volume, and Profit Formulas - Essay Example

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Cost, Volume, and Profit Formulas

The preferable outcome in most businesses is to sell as many units as possible, thus high volumes are preferable. The selling price is the unitary price of each product. It can be calculated by dividing the total sales by the amount of units sold. If a company had sales of $5,000 and it sold 100 units the unitary price is $50 per unit. There are two types of costs. These two types of costs are variable costs and fixed costs. A variable cost can be defined as a cost of labor, material, or overhead that changes according to the change in the volume of production units (Investorwords, 2011). Variable cost per unit can be calculated dividing total variable costs by the quantity of units sold. The second type of cost is fixed costs. Fixed costs are costs that do not change with the volume of sales. The total amount of fixed costs is the same every month. Some examples of fixed costs include rent, managerial salaries, and depreciation (Moneyterms, 2011). The total fixed expenses component is calculated by adding up all the fixed costs of the company. The sales mix is the relative proportion in which a company’s products are sold (Garrison & Noreen, 2003). ...Show more

Summary

The Cost-Volume-Profit (CVP) analysis is composed of five components. The five Cost-Volume-Profit components are volume or activity level, unit selling price, variable cost per unit, total fixed costs, and sales mix…
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