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Chapter 5 - Lecture6 CVPAnalysis CVP: if?questions...

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Lecture 6 CVP Analysis
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Cost volume Profit Analysis CVP: analytical technique used by  managerial accountants to address What  if? questions.  This technique summarizes the effects of  changes in an organization’s  volume  of  activity on its  costs, revenue, and profit. What will happen to student enrolment if the Carleton University raise tuition fees for grad studies?
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Break-Even Point The break-even point is the volume of  activity where the organization’s revenue  and expenses are equal. At this amount of  sales, there is no loss or profit; it break- even. Revenues – Total cost = Operating Profit =0 $Revenues = $Total Cost $Revenues = $Variable Cost + Fixed Cost 
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Break - Even $Revenues = $Variable Cost + Fixed Cost #units*Price = #units*VC/unit + Fixed Cost #units*(Price- VC) = Fixed Costs #units (B-E) =     Fixed Cost      (Price – VC/unit)    The # of units where revenues equals expenses  is the break-even point in terms of volume
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Break-Even (in $) Contribution margin = Price – Variable Cost/unit Then B-E (units) = Fixed Cost       C. Margin To convert this # into dollars ..*Price Contribution Margin Ratio (%)= (P – VC)/P Then B-E ($) =  Fixed Cost                   C. Margin Ratio
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Example Activity (units) 9000 8000 Sales ($16)        $144,000          $128,000 Variable Exp.($10) (90,000 )    (80,000 ) Total Cont. Margin      54,000     48,000 Less Fixed Expenses    (48,000              (48,000 ) Profit        $6,000      $ 0
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