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Unformatted text preview: CHAPTER 8: COST-VOLUME-PROFIT ANALYSIS QUESTIONS 8-1 The underlying relationship in cost-volume-profit analysis is that costs, revenues, and profits all change in a predictable way as the volume of activity changes. 8-2 It is more practical to find the breakeven point in sales dollars for companies having thousands of individual items. Finding the breakeven point for each item would be laborious and meaningless. 8-3 The contribution margin ratio is: price - variable costs price The contribution margin ratio (CMR) represents the net contribution per sales dollar. The CMR tells us the change in profit associated with a given change in sales dollars. It is a useful measure of the relative contribution to profit of different products, divisions, or sales units. The use of this ratio can give a retail store a good approximation of the sales dollars necessary for the store to break even. A higher CMR is associated with higher risk. A higher CMR can have a more favorable impact on profit. However, if sales fall below breakeven, then a high CMR will yield a relatively more negative impact on profits. 8-4 The basic assumption of the CVP model is that the behavior of revenues and total costs is assumed to be linear over the relevant range of activity. Managers...
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This note was uploaded on 10/26/2010 for the course MBA FIN301 taught by Professor Park during the Spring '10 term at Liberty.

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