Page 844 - Accounting Principles (A Business Perspective)

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An accounting perspective:

Uses of technology

Cost-volume-profit analysis using a computer spreadsheet is becoming routine. In many business
meetings, we find one or more people crunching cost-volume-profit numbers on their notebook or
laptop computers.

Effect of automation on cost-volume-profit analysis

Increasing automation does not affect the fundamental CVP model or the types of analysis we have discussed.
However, it does affect the relative size of fixed and variable costs. As companies become more automated, they
substitute machinery for labor. Companies that make this substitution often increase fixed costs and decrease
variable costs. For example, when banks installed automated teller machines, their labor costs decreased but their
fixed costs, including machine depreciation, increased.
When a company substitutes fixed costs for variable costs, the total cost line shifts up as shown in Exhibit 174. At

low levels of volume, becoming more automated increases total costs, but at high levels of volume it decreases
them. What does this do to the company's break-even point? It depends on where the revenue line crosses the total
cost line.

Exhibit 174: Effects of automation

If it crosses at low volumes, to the left of point A in Exhibit 174, then increasing automation increases the
company's break-even point. At high volumes, however, if increasing automation lowers total costs, it lowers the
company's break-even point.
In this chapter we began studying short-run decisions based on cost-volume-profit analysis. In Chapter 22 we
will apply differential analysis to short-term decisions.

Accounting Principles: A Business Perspective 845 A Global Text