Cost-Volume-Profit Analysis
A straightforward application of this type of model
is in cost-volume-profit analysis to evaluate short-term product related
decisions. Although the assumptions of the model limit its practical
application to very simple product settings, it does provide a useful
introduction to the management accountant's approach to decision-modelling.
Cost-volume-profit calculations using this model are extremely straightforward,
and the results lend themselves to simple graphical illustration.
Example: A company produces a single product
which has a variable cost of £20 per unit to produce, and sells for
£34 per unit. If the company expects to incur fixed costs of £70,000
this year, how many units of the product must it sell this year to break-even.
