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Acct+315+Chap+3+CVP+Handout[1]

Acct+315+Chap+3+CVP+Handout[1] - Chapter 3...

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Chapter 3 Cost-Volume-Profit Analysis I. Cost-Volume-Profit Analysis A. CVP Analysis examines relationships : CVP analysis , often referred to as break- even analysis, examines the interrelationship of sale activity, prices, costs, and profits in planning and decision-making situations for an organization. B. Cost are variable and fixed : An organization’s costs are categorized into variable and fixed components before beginning the analysis. C. Contribution and equation approach : There are two approaches to calculating the break-even point for a firm: the contribution-margin approach and the equation approach. I. The Contribution-margin approach A. Based on amount of profit contributed : This approach is based on the concept of the contribution margin , or the amount that each unit contributes toward covering fixed expenses and generating profit. Mathematically, the contribution margin per unit is calculated as follows: Contribution Margin = Selling Price — Variable Expenses Per Unit B. Break-even is where fixed expenses are covered : If the contribution margin is the amount that each unit contributes toward covering the fixed expenses, the break-even point in units, or the point where the fixed expenses are covered can be found in the following manner: Break-even Sales (in units) = Fixed Expenses Contribution Margin per unit C. Break-even in dollars : To find the break-even point in dollars simply multiply the break-even point in units by the selling price. Alternatively, one can use the contribution margin ratio, which is the contribution margin expressed as a percentage of the selling price. Thus: Break-even Sales (in dollars) = Fixed Expenses Contribution Margin Ratio I. The Equation Approach Sales - Total Variable Expenses – Total Fixed Expenses = Profit Break-even Sales (in dollars) = Total Variable Expenses + Total Fixed Expenses
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