ACC221ch06sp08

# ACC221ch06sp08 - ACC221 Chapter 6 Cost-Volume-Profit...

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1 ACC221 Chapter 6 Cost-Volume-Profit Relationships 2 Objectives Covered 1. Explain how changes in activity affect contribution margin and net operating income. 2. Prepare and interpret a cost-volume-profit (CVP) graph. 3. Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume. 4. Show the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume. 5. Compute the break-even point in unit sales and sales dollars.

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3 Objectives Covered 6. Determine the level of sales needed to achieve a desired target profit. 7. Compute the margin of safety and explain its significance. 8. Compute the degree of operating leverage at a particular level of sales and explain how the degree of operating leverage can be used to predict changes in net operating income. 9. Compute the break-even point for a multiple product company and explain the effects of shifts in the sales mix on contribution margin and the break-even point. 4 Objective 1 Explain how changes in activity affect contribution margin and net operating income.
5 CVP Analysis Focuses on: 1. Prices of products. 2. Volume or level of activity. 3. Per unit variable costs. 4. Total fixed costs. 5. Mix of products sold. 6 Contribution Margin The amount remaining from sales revenue after variable expenses have been deducted. The amount available to cover fixed expenses and then to provide for profits (net income) for the period. Sales – Variable Costs = Contribution Margin

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7 Break Even Point The point where total sales revenue equals total expenses (variable and fixed). The point where total contribution margin equals total fixed expenses. The point where net income is equal to zero. 8 Contribution Margin Impact If the contribution margin is not sufficient to cover the fixed expense, then a loss occurs for the period. Once the break-even point has been reached, net income will increase by the unit contribution margin for each additional unit sold. Increase in activity will not change the per unit contribution margin. Per unit contribution margin remains the same over the relevant range. Increase in activity will increase total contribution margin, which means there is more contribution margin to cover fixed expenses and then contribute to profit.
9 Objective 2 Prepare and interpret a cost-volume-profit (CVP) graph. 10 Cost-Volume-Profit Graph Highlights CVP relationships over wide ranges of activity and can give managers a perspective that can be obtained in no other way. Clearly shows break-even point and profit and loss areas. Useful in demonstrating these ideas to senior management.

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11 Steps in preparing a CVP graph 1. Draw a line parallel to the volume axis to represent total fixed expenses. 2.
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## This note was uploaded on 06/09/2008 for the course ACC 221 taught by Professor Tribunella during the Spring '08 term at Rochester.

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ACC221ch06sp08 - ACC221 Chapter 6 Cost-Volume-Profit...

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