Cost, Volume, and Profit Formulas Essay - 741 Words



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Cost, Volume, and Profit Formulas

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All businesses require becoming profitable or at some point they will fail. Accounting plays an essential role in determining if the company will become successful and continue to do so over time. Using well-defined formulas in order to assess the exact numbers will facilitate the actions a company needs to carry out in order to maintain its goals. The accounting department would look at the cost-volume-profit analysis to concentrate on the different components that change the profitability of any business. The cost-volume-profit analysis consist of five components, these are: unit selling price, fixed cost per unit, sales mix, and volume activity. Each component plays a vital role and is just as important as the next although, each is dissimilar to the other. Volume activity can otherwise be known as sales activity, meaning the total of units sold. Whereas, the unit selling price is the number in which the unit is sold for. An example would consist of this; if four gallons of paint sold for a total of $100, that would mean that each can of paint cost $25 per gallon. Therefore, the unit selling price for each gallon of paint would be $25. The variable costs per unit are the expenses that are required in order to make the unit. This could include but is not limited to the changing costs of items such as raw materials and/or labor. The fixed cost per unit is similar to the variable costs per unit however; it does not change in costs. These are costs that can be presumed to stay the same throughout the year including fixed costs such as taxes and utilities. Because most companies and retail stores carry different items at different prices there would be a blend of numbers in sales referred to as the sales mix. The formula for contribution margin per unit is expressed as: the unit selling price subtracted by the unit variable costs. Thus, an increase of the unit selling price would equal a higher contribution margin per... Show More

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