Cost-volume relationship utilization
Cost-volume-profit study is an estimating concept which can be employed in a variety of pricing circumstances. You can employ the cost-volume relationship for:
Computing item price in price analysis: Cost-volume-profit analysis supposes that net cost is composed of fixed and variable elements. This supposition can be employed to elucidate price changes and also cost changes. Since the volume being obtained raises unit costs decline. Since unit costs decline, the vendor can decreases prices and same make the similar profit per unit.
Computing direct costs in pricing new contracts: Quantity differences will frequently affect direct costs -- specifically direct material cost. Direct material needs frequently involve a fixed component for development or production operation set-up. Since that direct cost is spread over a rising volume unit costs must decline.
Computing direct costs in pricing contract changes: How will a rise in contract effort raise contract price? A few costs will raise others will not. The ideas of cost-volume-profit study can be a priceless aid in considering the result of the change on contract price.
Computing indirect costs: The principles of cost-volume-profit study can be employed in indirect cost analysis. Mostly indirect costs are fixed or semi-variable. Since overall volume rises, indirect cost rates usually decline since fixed costs are spread over a raising production volume.