Lecture 4 - CVP Analysis

# Lecture 4 - CVP Analysis - Cost-Volume-Profit Analysis...

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Cost-Volume-Profit Analysis Vocabulary • Gross Margin = Revenue - Cost of goods sold. All COGS are manufacturing costs. Some COGS are fixed costs. GM ratio = GM / Revenue • Contribution margin = Revenue - Variable costs Some VC are manufacturing costs, but some may be non-manufacturing costs. No VC are fixed. CM ratio = CM / Revenue Gross margin • Gross Margin = Revenue – COGS • Cost of goods sold = Direct materials Direct labor Applied overhead • Overheads are usually mixed costs and include some fixed components

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Contribution margin • Contribution margin = Revenue – all VCs • All Variable costs = manufacturing VC + non-manufacturing VC • Given enough information, we can calculate gross margin from contribution margin, and vice versa Contribution Margin vs. Gross Profit Comparative Statements Revenues: \$200 Less: Variable Cost of Goods Sold \$120 Variable Operating Costs 45 165 Contribution Margin 35 Fixed Operating Costs 20 Operating Income \$15 Contribution Margin Income Statement (Internal-Use Only) Revenues: \$200 Less: Cost of Goods Sold \$120 Gross Margin (Profit) 80 65 Operating Income \$15 Financial Accounting Income Statement GAAP - Based Simple model • The fundamental accounting equation Profit ( π ) = Revenues - Costs Revenue = SP*units sold where, SP = selling price Costs = FC + (VC*units manufactured) where, FC = fixed cost VC = unit variable costs
Within this model We are assuming that units manufactured = units sold. What if we want to know how much

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## This note was uploaded on 05/19/2008 for the course ACCT 2521 taught by Professor Basu during the Fall '07 term at Temple.

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Lecture 4 - CVP Analysis - Cost-Volume-Profit Analysis...

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