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Unformatted text preview: Smeal College of Business Accounting for Decision Making: ACCTG 211 Pennsylvania State University Professor Huddart Cost-Volume-Profit Analysis 1. The Basic Idea Variable costs are a multiple of sales ($ or units). Total contribution margin is the difference between sales dollars and variable costs. Volume (i.e., the number of units) is the only driver. CVP analysis has the virtue of being quick and easy. 2. Terminology There are two distinctions between contribution margin (CM) and gross margin (GM). Variable marketing and administrative expenses are subtracted to get CM (but not GM), and fixed manufacturing overhead is subtracted to get GM (but not CM). CoGS, or Cost of Goods Sold, usually includes some fixed costs. CM = sales- all variable costs gross profit = GM = sales- CoGS c Steven Huddart, 20012008. www.personal.psu.edu/sjh11 ACCTG 211 Cost-Volume-Profit Analysis 3. Schema: The CVP Chart Step 1. Decide on the purpose....
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