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Unformatted text preview: Chapter Six Learning Objective 1 Basics of CostVolumeProfit Analysis Basics of CostVolumeProfit Analysis The Contribution Approach Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses and profit. The Contribution Approach Each month, Racing must generate at least $80,000 in total CM to break even. The Contribution Approach If Racing sells 400 units 400 units in a month, it will be operating at the breakeven point . The Contribution Approach If Racing sells one more bike ( 401 bikes 401 bikes ), net operating income will increase by $200 . The Contribution Approach Learning Objective 2 CVP Relationships in Graphic Form The relationship among revenue, cost, profit and volume can be expressed graphically by preparing a CVP graph. Racing developed contribution margin income statements at 300, 400, and 500 units sold. We will use this information to prepare the CVP graph. CVP Graph CVP Graph CVP Graph CVP Graph CVP Graph Learning Objective 3 Contribution Margin Ratio The contribution margin ratio is: For Racing Bicycle Company the ratio is: Contribution Margin Ratio Or, in terms of units , the contribution margin ratio is: For Racing Bicycle Company the ratio is: Contribution Margin Ratio Quick Check Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the CM Ratio for Coffee Klatch?...
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 Spring '10
 DICK

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