ACCT2301-002-chap3-sp2009

ACCT2301-002-chap3-sp2009 - 1 Chapter 3 Cost-Volume-Profit...

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Unformatted text preview: 1 Chapter 3 Cost-Volume-Profit Analysis: A Managerial Planning Tool adapted from Fundamental Cornerstones of Managerial Accounting Heitger, Mowen and Hansen (2008) Professor D. Collins Learning Objectives – Chapter 3 Determine the breakeven point in number of units and in total sales dollars. Determine the number of units that must be sold, and the amount of revenue required, to earn a targeted profit. Prepare a profit-volume graph and a cost- volume-profit graph and explain the meaning of each. Apply cost-volume-profit analysis in a multiple-product setting. Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis. Cost-Volume-Profit Relationships Cost-Volume-Profit (C-V-P) Analysis - the study of the how changes in costs (both variable and fixed), sales volume, and price affect a company’s profit. Surveys suggest that over 50 percent of responding firms use some form of C-V-P analysis. Useful in answering such questions as: • How will profits be affected if we sell 1,000 more units? • What happens if we raise or lower our selling prices? • What happens if we cut fixed costs by 20 percent? • How many units must we sell in order to break even? • How might changes in product mix affect our profits? 4 A New Form of Income Statement? Functional format: Sales xxxx − COGS xxxx = Gross margin xxxx − SG&A expenses xxxx = Operating income xxxx Contribution format: Sales xxxx − Variable expenses xxxx = Contribution margin xxxx − Fixed expenses xxxx = Operating income xxxx Why the distinction? Rearranging expenses by cost behavior helps managers better understand how changes in revenues and expenses affect operating profitability. Income Statement Organized by Function Sales − COGS − SG&A exp . = Operating income . COGS includes only product-related (or service-related) expenses. SG&A (selling, general and administrative) expenses reflect only period costs. Both COGS and SG&A expenses can contain either variable costs, fixed costs, or both. Because these expenses contain both variable and fixed components, it is difficult to predict how the expenses will vary if sales increase or decrease. Income Statement Organized by Cost Behavior Sales − Variable exp . − Fixed exp . = Operating income ....
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This note was uploaded on 02/16/2009 for the course ACCT 2301 taught by Professor Staff during the Spring '08 term at Texas Tech.

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ACCT2301-002-chap3-sp2009 - 1 Chapter 3 Cost-Volume-Profit...

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