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GNB_06_12e - Chapter Six Learning Objective 1 Basics of...

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Chapter Six Learning Objective 1 Basics of Cost-Volume-Profit Analysis Basics of Cost-Volume-Profit 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
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If Racing sells 400 units 400 units in a month, it will be operating at the break-even 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
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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:
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Contribution Margin Ratio Quick Check ü 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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