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312-Ch07RevNotes(8th) - CHAPTER 7 COST-VOLUME-PROFIT...

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CHAPTER 7 - COST-VOLUME-PROFIT ANALYSIS COST-VOLUME-PROFIT (CVP) ANALYSIS CVP analysis , often referred to as break-even analysis, examines the interrelationship of sales  activity, prices, costs, and profits in planning and decision-making situations. The  break-even point  is the point where revenues and expenses are equal. An organization's costs are categorized into variable and fixed components before beginning the  analysis. There are two approaches to calculating the break-even point for a firm: the contribution-margin  approach and the equation approach.  The contribution-margin approach is based on the concept of the  contribution margin,  or the  amount that each unit contributes toward covering fixed expenses and generating profit.   Contribution margin = Selling price - Variable expenses per unit Break-even point (units) = Fixed expenses ÷ Contribution margin per unit 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 point ($) = Fixed expenses  ÷  Contribution margin ratio The equation approach is based on the net income equation that students already know:  Sales –  Total variable expenses – Total fixed expenses = Profit. At the break-even point, sales revenues equal the sum of variable and fixed expenses since  profit is zero.  Thus:   Sales ($) = Total variable expenses + Total fixed expenses (Unit sales price * Unit sales volume)  =   (Unit variable expense * Unit sales volume) + Fixed expenses Chapter 7 Review Notes Acc 312 - Page 1
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then solve for the Unit sales volume and that is the BE point CVP relationships can be communicated in the form of a  cost-volume-profit graph,  which shows  the effects on profit of a change in volume (see Exhibit 7-1 in the text).   An alternative format, called a  profit-volume graph,  highlights the amount of profit or loss at a  given level of activity (see Exhibit 7-3).
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