Lecture 17 0405 - ORIE 350 April 5 2007 CVP...

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ORIE 350 April 5, 2007 CVP
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Cost-Volume-Profit Analysis CVP analysis , often referred to as break-even analysis, examines the interrelationship of sales activity, prices, costs, and profits in planning and decision-making situations. The break-even point is the point where revenues and expenses are equal. An organization's costs are categorized into variable and fixed components before beginning the analysis.
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Assumptions of CVP Analysis 1. Selling price is constant. 2. Costs are linear and can be accurately divided into fixed and variable elements. 3. In manufacturing companies, inventories do not change (units produced = units sold).
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Techniques We can analyze the situation graphically, but actual numbers are difficult to read off of the graph. Algebraic solution makes a lot more sense when we need actual numerical results.
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Contribution Margin Take sales and subtract all variable costs. What is left is the contribution margin This contribution margin goes towards paying fixed costs.
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