ch6 - Chapter 6 Cost-Volume Profit Relationships...

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Unformatted text preview: Chapter 6: Cost-Volume- Profit Relationships Cost-Volume-Profit Analysis - Overview b Examines the interrelationship of sale activity, prices, costs and profits b Categorizes costs into variables and fixed components. B Contribution format income statement is very useful Contribution Approach b Review of contribution format income statement Sales revenues XX Less : Variable expenses (XX) Contribution margin XX Less : Fixed expenses (XX) Net operating income XX Contribution Approach b Contribution margin: r Covers fixed expenses r Remaining: contributes to profits b Contribution margin per unit: Unit contribution margin = unit selling price – variable expenses per unit Contribution Approach b Note: (1) Contribution margin covers fixed expenses first. If not, there is a loss. (2) The unit contribution margin remains constant so long as the selling price and the unit variable cost do not change. Contribution approach b Break-even point: where r Total sales revenue equals total expenses r Total contribution margin equals total fixed expenses. r Each additional unit sold over the break-even point increases net operating income by the amount of the unit contribution margin. r Note: Once the break-even point and unit contribution margin is known B estimated profits at a particular sales volume = number of units sold above break-even X unit contribution margin Illustrative Example 1 – part a & b Last month’s contribution format income statement for Nord Corporation, a manufacturer of exercise bicycles, follows: Required: (a) Prepare Contribution income statement for monthly sales of 1, 2, 400 bicycles. (b) Compute the profit at monthly sales of 401 bicycles with and without using contribution income Total Per Unit Sales (500 bikes)........... $250,000 $500 Variable expenses.......... 150,000 300 Contribution margin....... 100,000 $200 Fixed expenses.............. 80,000 Net operating income..... $ 20,000 Illustrative Example 1 – part a & b (cont.) (a) Sales of 1 and 2 bicycles Illustrative Example 1 – part a & b (cont.) (a) Continued: Sales of 400 bicycles b Break-even Illustrative Example 1 – part a & b (cont.) (b) Sale of 401 bicycles: Compute profits by preparing contribution income statement: Illustrative Example 1 – part a & b (cont.) (b) Continued: Compute profits without preparing contribution income statement: Profits at 401 bicycle sale level = number of units sold above break-even X unit contribution margin =(401-400) X 200 = $ 200 CVP Relationships in Equation Form b Profit = (Sales – Variable expenses) – fixed expenses In which , Sales = Quantity sold (Q) x Selling price per unit (P) Variable expenses = Quantity sold (Q) x variable expenses per unit (V) B Profit = (P x Q – V x Q) – Fixed expenses CVP Relationships in Equation Form b Profit equation expressed in terms of unit contribution margin: r Profit = (P x Q – V x Q) – Fixed expenses B Profit = (P - V) x Q – Fixed expenses B Profit = Unit CM x Q – Fixed expenses CVP Relationships in Graphic Form Total expenses Total revenue Volume Profit Fixed expenses Break-even point Contribution Margin Ratio...
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ch6 - Chapter 6 Cost-Volume Profit Relationships...

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