1. Use the high-low method to compute the function relating advertising costs and revenues 2. Using the high-low equation, what is the increase in revenues for each $ 1 000 spent on advertising within the relevant range?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
| The |
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| relationship between online advertising and sales revenues at the shop. She ob- | ||
| tains the following data for the past 10 months: | ||
| Month: | Revenues: | Advertising Costs: |
| March | $51.000 | $1.500 |
| April | $72.000 | $3.500 |
| May | $56.000 | $1.000 |
| June | $64.000 | $4.000 |
| July | $57.000 | $ 500 |
| August | $64.000 | $1.500 |
| September | $43.000 | $1.000 |
| October | $82.000 | $4.500 |
| November | $56.000 | $2.000 |
| December | $61.000 | $2.000 |
| Required: | ||
| 1. Use the high-low method to compute the function relating advertising costs and revenues | ||
| 2. Using the high-low equation, what is the increase in revenues for each $ 1 000 spent on | ||
| advertising within the relevant range? | ||
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