Steve Smith has completed a forecast of cost-volume-profit analysis for the Swis

Question

Steve Smith has completed a forecast of cost-volume-profit analysis for the Swiss Chocolate Manufacturing Company’s U.S. division manufacturing plant for the coming year. Smith notes the decline in volumes and prepares the breakeven analysis and computes the margin of safety; he notes that the current production volume projections indicate that the margin of safety will be positive for the period. However, the company will not achieve the sales volume required to achieve its desired level of operating and net income. In addition, the degree of operating leverage is high. Rick White has been tasked with suggesting some cost savings by the vice president of operations.

In a well-written paper demonstrating standards, discuss the following.

Given the fact pattern above, identify whether White should seek reductions in variable or fixed costs for the greatest impact on the forecast.

Explanation / Answer

First of all, CVP analysis is considered to be analysis not that the real one. Fixed cost always fixed there is no use to reduce the fixed cost. But there is an exception.

The degree of operating leverage is high, so the net income increase in high level. Though in this case not achieve the sales volume the reason is some companies having high fixed cost expenses that equal to variable expenses. It means check in cost strcuture and reduce the fixed cost.

There is no need to change in selling price though unit volume change, it should be remain constant.

But look out for fixed cost for the reduction.

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