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chapter 6

# chapter 6 - Cost Volume Profit Analysis Additional Issues...

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Cost Volume Profit Analysis- Additional Issues CVP Review CVP analysis- study of the effects of changes in costs and volume on a company’s profit, important for profit planning and management decisions. BASIC CONCEPTS Internal use income statement classifies costs as variable or fixed and gets a contribution margin- amount of revenue after subtracting variable costs (total amount or per unit basis) “cost”- includes all costs and expenses related to production and sale of the product (manufacturing and selling and administrative) BASIC COMPUTATIONS Break even analysis: o FC / CONTRIBUTION MARGIN PER UNIT = BREAK EVEN IN UNITS o FC / CONTRIBUTION MARGIN RATIO = BREAK EVEN IN DOLLARS CONTRIBUTION MARGIN/CONTRIBUTION SALES = CONTRIBUTION MARGIN RATIO Target net income o (FC + TARGET NI) / CONTRIBUTION MARGIN PER UNIT = REQUIRED SALES IN UNITS o (FC + TARGET NI) / CONTRIBUTION MARGIN RATIO = REQUIRED SALES IN DOLLARS Margin of Safety o Tells us how far sales can drop before the company will operate at a loss o ACTUAL (EXPECTED) SALES – BREAK EVEN SALES = MARGIN OF SAFETY IN DOLLARS o MARGIN OF SAFETY IN DOLLARS / ACTUAL/EXPECTED = MARGIN OF SAFETY RATIO CVP AND CHANGES IN THE BUSINESS ENVIRONMENT Case 1: competitor is offering 10% discount on its item. Should we do the same? Effect on break even? o Selling price – (selling price x .10) = new selling price, lowering the contribution margin, FC stay same, VC same o This change required monthly sales to increase in order to break even Case 2: new robotic equipment to meet foreign competition, lower DL, TFC will increase and Variable cost per unit decrease both by 30%, effect on sales volume required to break even?

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