Ms. Wang is a successful businesswoman who sells various cosmetic products. She

Question

Ms. Wang is a successful businesswoman who sells various cosmetic products. She continually searches for new products to add to her growing business to further increase the profitability of her company. She is discussing with her senior staff about what products to add and not add to her product lines.

Required:
2 pts 1. What types of cost information should Wang estimate/calculate to help her decide whether to add or not add new products to her existing product lines.
1 pt    2. Briefly describe the C-V-P model.
2 pts   3. Describe/give an example of how the C-V-P model could be used by Ms. Wang

Explanation / Answer

1. Following types of cost information should Wang estimate to help her decide:

2. Following is the brief description of CVP model:

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned with the effect of sales volume and product costs on operating profit of a business. It deals with how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more different products.

3. Ms. Wang can use CVP model in following way:

Estimate the variable and fixed cost associated with each new products she is willing to add. on the basis of this information, profitability of each product can be estimated for decision making purpose.

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