- 20 Marks
IMAC – DEC 2022 – L1 – Q5 – Cost Segregation and Estimation | Cost-Volume-Profit (CVP) Analysis
Estimation of fixed and variable costs using linear regression and discussion of assumptions underlying Cost-Volume-Profit (CVP) analysis.
Question
a) Total production costs each week in a production department have been measured for the past five weeks, as follows:
| Week | Units Produced | Total Cost (GH¢000) |
|---|---|---|
| 1 | 5 | 20 |
| 2 | 9 | 27 |
| 3 | 4 | 17 |
| 4 | 5 | 19 |
| 5 | 6 | 23 |
Required:
i) Use linear regression analysis to obtain an estimate of fixed costs per week and the variable cost of production per unit (see formula table). (8 marks)
ii) Use your results to estimate total costs in a week when 8 units are produced. (3 marks)
iii) Explain why the regression analysis method of separating cost is considered more accurate than the high-low method. (4 marks)
b) The cost-volume-profit (CVP) analysis, also commonly known as breakeven analysis, looks to determine the breakeven point for different sales volumes and cost structures, which can be useful for managers making short-term business decisions. For CVP analysis to be effective, several assumptions are usually made.
Required:
State FOUR (4) assumptions underlying cost-volume-profit (CVP) analysis. (5 marks)
Find Related Questions by Tags, levels, etc.