Chapter 6

Chapter 6 - Chapter Six Cost Volume Profit Relationships...

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Chapter Six Cost Volume Profit Relationships Cost-volume-profit analysis is a powerful tool that helps managers understand the relationships among cost, volume and profit. CVP analysis focuses on how profits are affected by the following factors: 1. Selling prices 2. Sales volume 3. Unit variable costs 4. Total fixed costs 5. Mix of products sold It is a vital tool in many business operations such as: 1. What products and services to offer. 2. What prices to charge. 3. What marketing strategy to use. 4. What cost structure to implement. The Basic Cost-Volume-Profit Analysis o Contribution Margin Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. It is the amount available to cover fixed expenses and then to provide profits for the period. If the contribution margin is not sufficient to cover the fixed expenses, a loss occurs for the period. Break Even – to show neither profit nor loss but just cover all of the costs. Level of sales at which the profit equals zero. Once the break even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold. To estimate the profit at any sales volume above the break even point, multiply the number of units sold over the break even point by the unit contribution margin. The result represents the anticipated profits for the period. To estimate the effect of a planned increase in sales on profits, multiply the increase in units sold by the unit contribution margin. The result will be the expected increase in profits. If there were no sales, a companys loss would equal its fixed
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Chapter 6 - Chapter Six Cost Volume Profit Relationships...

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