Chapter_6_Outline - Chapter 6 Lecture Notes Chapter theme...

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Chapter 6 Lecture Notes Chapter theme: Cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit by focusing their attention on the interactions among the prices of products, volume of activity, per unit variable costs , total fixed costs , and mix of products sold. It is a vital tool used in many business decisions such as deciding what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire. I. Cost-volume-profit (CVP) analysis A. The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. i. Notice the emphasis on cost behavior. Variable costs are separate from fixed costs ii. The contribution margin is defined as the amount remaining from sales revenue after variable expenses have been deducted. iii. Contribution margin is used first to cover fixed expenses. Any remaining contribution margin contributes to net operating income. iv. Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. 1. For each additional unit sold, the amount of contribution margin per unit will help to cover fixed expenses and then provide a profit if there is one. 2. The total contribution margin must equal fixed costs to break-even (which is the level of sales at which profit is zero). For each unit sold after the break-even point, net operating income increases by the contribution margin per unit. B. Expressed algebraically, the CVP model looks like this: Profit = (p – v)q – F or Profit = cm × q – F
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Where p is the unit selling price, v is the variable cost per unit, q is the unit sales, F is the fixed cost, and cm is the unit contribution margin. C. CVP expressed graphically i. Put volume on the x axis, and costs on the y axis. Draw a line parallel to the volume axis to represent fixed expense.
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Chapter_6_Outline - Chapter 6 Lecture Notes Chapter theme...

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