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Unformatted text preview: CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS 3-1 Cost-volume-profit (CVP) analysis examines the behavior of total revenues, total costs, and operating income as changes occur in the output level, selling price, variable costs per unit, or fixed costs. 3-2 The assumptions underlying the CVP analysis outlined in Chapter 3 are: 1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced and sold. 2. Total costs can be divided into a fixed component and a component that is variable with respect to the level of output. 3. When graphed, the behavior of total revenues and total costs is linear (straight-line) in relation to output units within the relevant range. 4. The unit selling price, unit variable costs, and fixed costs are known and constant. 5. The analysis either covers a single product or assumes that the sales mix, when multiple products are sold, will remain constant as the level of total units sold changes. 6. All revenues and costs can be added and compared without taking into account the time value of money. 3-3 Operating income is total revenues from operations for the accounting period minus total costs from operations (excluding income taxes): Operating income = Total revenues Total costs Net income is operating income plus nonoperating revenues (such as interest revenue) minus nonoperating costs (such as interest cost) minus income taxes. Chapter 3 assumes nonoperating revenues and nonoperating costs are zero. Thus, Chapter 3 computes net income as: Net income = Operating income Income taxes 3-4 Contribution margin is computed as the difference between total revenues and total variable costs. Contribution margin per unit is the difference between selling price and variable cost per unit. Contribution-margin percentage is the contribution margin per unit divided by selling price. 3-5 Three methods to calculate the breakeven point are the equation method, the contribution margin method, and the graph method....
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This note was uploaded on 04/05/2010 for the course BUSINESS 11 taught by Professor 11 during the Spring '10 term at University of Hawaii, Manoa.
- Spring '10