Video: Cost-Volume Profit Analysis

In this lesson, delve into the simplicity behind Cost-Volume-Profit (CVP) analysis with Nick Palazzolo, CPA, as he uncovers the mystery of breakeven formulas and how they relate to contribution margin, variable costs, and the margin of safety. Discover the straightforward nature of CVP and how it serves as a tool to understand the impact of cost changes on a firm's profitability. Nick demystifies the common assumptions behind CVP, emphasizing the need to memorize them, as they frequently appear in multiple-choice questions. He illustrates the relevance of these assumptions in real-world applications, explaining concepts such as the relevant range and how costs behave over time. The lesson concludes with an in-depth look at key CVP formulas that are essential for making informed business decisions and stresses the importance of memorization to navigate through potential exam scenarios effectively.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Cost volume profit analysis. Oh boy. Oh boy, oh boy. Now when I was taking cost accounting, no one explained how simple this was. All this is cost volume profit analysis.

It's just all the breakeven formulas. It's the formulas of contribution margin, breakeven variable costs, margin of safety, all of those. That's all it is. And it's a way to find out how how changes in variable and fixed costs affect a firm's profit. Companies can use cost volume profit analysis which again is just a bunch of formulas which you'll see next slide to see how many units they need to sell to break even, which is cover all costs or reach a certain minimum profit margin.

All the breakeven formulas which I conveniently put on a slide for you we see coming up are under the umbrella of cost volume profit analysis. Now we've got some assumptions here. These are just items to memorize. They should make sense, some of them will make sense. But these are items to memorize and you could see multiple choice questions on these.

So be familiar. All right, let's walk through them. Total costs are not directly proportional to volume. Well, that makes sense, right? Because variable costs are proportional to the volume, but fixed costs are not.

So that makes sense. Should make sense, right? Total cost equals fixed plus variable and only the variable are proportional to volume. Volume is the only relevant factor affecting cost. So repeat that.

Volume is the only relevant factor affecting cost. Now it's the only factor that can change. That's what we're kind of getting at here. But memorize this terminology, I've seen this pop up way too many times. All costs can be divided into fixed and variable elements.

Makes sense. But even though it makes sense, memorize

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