Chapter 5-MA

Chapter 5-MA - Chapter 5-Cost-Volume-Profit Relationships

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Chapter 5-Cost-Volume-Profit Relationships Cost-volume-profit(CVP) analysis: is a powerful tool that helps mangers understand the relationships among cost, volume, and profit. CVP analysis focuses on how profits are affected by the follow five factors: 1. Selling prices 2. Sales volume 3. Unit variable costs 4. Total fixed costs 5. Mix of products sold b/c CVP analysis helps mangers understand how profits are affected by these key factors, it is a vital tool in many business decisions these decisions include what products and services to offer, what prices to charge, what marketing strategy to use and what cost structure to implement The Basic CVP Analysis starts with the contribution income statement o emphasizes the behavior of costs and therefore is extremely helpful to managers in judging the impact on profits of changes in selling price cost, or volume o variable expenses, sales, and contribution margin are expressed as total and as per unit Contribution Margin Contribution Margin: is the amount remaining from sales revenue after variable expenses have been deducted, thus it is the amount available to cover fixed expense and then to provide profits for the period If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period If for example you add 100 to contribution margin, your loss would decrease by 100 Break-even point: is the level of sales at which profit is zero. o Once the break even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold. to estimate the profit at any sales volume above the break-even point, simply multiply the number of units sold in excess of the break-even point by the unit contribution margin o number of units sold in excess of break-even point X unit contribution margin o gives anticipated profits for the period to estimate the effect of a planned increase in sales on profits, multiply the increase in units sold by the unit contribution margin o increase in units sold X contribution margin o gives expected increase in profits to summarize, o if sales are zero, the company’s loss would equal its fixed expenses o each unit sold reduces the loss by the amount of unit contribution margin o once the break-even point has been reached, each additional unit sold increases the company’s profit by the amount of the unit contribution margin CVP Relationships in Graphic Form the relationships among revenue, cost, profit, and volume are illustrated on a cost- volume-profit (CVP) graph a CVP graph highlights CVP relationships over wide ranges of activity Preparing the CVP graph
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in a CVP graph (sometimes called break-even chart), unit volume is represented on the horizontal (X) axis, dollars on the vertical (Y) axis PICTURE 5-1! 3 steps
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This note was uploaded on 02/02/2010 for the course BCOR 2000 at Colorado.

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Chapter 5-MA - Chapter 5-Cost-Volume-Profit Relationships

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