Analysis of Scatter Graph and Correlation Methods

What is the main advantage of the scatter graph method compared to the high-low method?

The scatter graph method is more reliable as it considers all data points, while the high-low method only considers the highest and lowest levels of activity.

What is a disadvantage of the scatter graph method?

Drawing the line of best fit involves objective estimation if done manually.

How can the issue of estimating the line of best fit in scatter graphs be addressed?

By using linear regression to compute fixed and variable costs mathematically.

What does correlation analysis measure?

Correlation analysis measures the strength and direction of the relationship between two variables.

What is the coefficient of correlation (r)?

The coefficient of correlation (r) is a numerical measure of the degree of association between two continuous variables, ranging from -1 to 1.

What does a coefficient of -1 or 1 indicate?

A coefficient of -1 or 1 indicates a perfect linear relationship between the variables.

What does a coefficient of 0 indicate?

A coefficient of 0 indicates no linear relationship between the variables.

How does the absolute value of the coefficient of correlation relate to the strength of the relationship?

The larger the absolute value of the coefficient, the stronger the relationship.

What does a positive coefficient of correlation indicate?

A positive coefficient indicates a direct correlation, where as one variable increases, the other also increases.

What does a negative coefficient of correlation indicate?

A negative coefficient indicates an inverse correlation, where as one variable increases, the other tends to decrease.

What is the advantage of least squares regression analysis?

It considers all data points, making it a more reliable method for separating mixed costs than the high-low method.

What is a disadvantage of least squares regression analysis?

It involves a lengthier and more complicated procedure of calculations and analysis compared to the high-low method.

What is Cost-Volume-Profit (CVP) analysis?

CVP analysis is the systematic examination of the relationships among costs, cost drivers (activity level), and profit.

What are the key factors affecting profit in CVP analysis?

Sales price, variable cost per unit, activity level, total fixed costs, and sales mix.

What is one simplifying assumption of CVP analysis regarding cost behavior?

Total revenues and total costs are linear in relation to output level within a relevant range and time period.

What does it mean when costs are classifiable as fixed or variable in CVP analysis?

Total costs can be separated into a fixed component that does not vary with output and a variable component that does.

What assumption is made about selling price and costs in CVP analysis?

The selling price, variable cost per unit, and fixed costs are assumed to be known and constant.

What does the break-even point (BEP) represent?

The break-even point is the level of sales where total revenue equals total costs, resulting in neither profit nor loss.

What is assumed about changes in revenue and costs in CVP analysis?

Changes in revenue and costs arise only from changes in the number of product or service units produced and sold.

What assumption is made about sales mix in CVP analysis?

If multiple products are sold, the sales mix is assumed to be constant as the total units sold change.

What is ignored in CVP analysis regarding financial considerations?

The time value of money is ignored.