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Lecture 16 CVP and Decision Making

# Lecture 16 CVP and Decision Making - Review of cost terms q...

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Review of cost terms Classifying the costs into period vs. product cost, if it is a product cost, further classify it into direct vs. indirect cost Factory heating cost Factory equipment maintenance costs Training costs for new administrative employees The travel cost of the company s sales persons Wages and salaries of factory security personnel The cost of air-conditioning executive offices Wages and salaries of the accounting department Depreciation on the equipment in the fitness room used by factory workers Telephone expenses incurred by factory management The cost of shipping the products to customers The CEO s salary Health insurance premiums for factory personnel

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Review of cost terms Classifying the costs into fixed vs. variable cost Small glass plates used for lab tests in a hospital Straight-line depreciation of a building Top-management salaries Electrical costs of running machines Advertising of products and services Batteries used in manufacturing trucks Commission to salespersons Insurance on a dentist s office Leather used in manufacturing footballs Rent on a medical center
Cost-Volume-Profit (CVP) Understand the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume. Compute the break-even point Use the CVP formulas to determine the activity level needed to achieve a desired target profit. Understand how product costs are used to support decision-making.

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Total Per Unit Sales (500 bikes) 250,000 \$ 500 \$ Less: variable expenses 150,000 300 Contribution margin 100,000 200 \$ Less: fixed expenses 80,000 Net income 20,000 \$ WIND BICYCLE CO. Contribution Income Statement For the Month of June Contribution Margin Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted.
Total Per Unit Sales (500 bikes) 250,000 \$ 500 \$ Less: variable expenses 150,000 300 Contribution margin 100,000

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