Chapter Six
Cost Volume Profit Relationships
Costvolumeprofit 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 CostVolumeProfit 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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 Spring '07
 STEEDLE
 Accounting, Contribution Margin

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