Chapter 6 - CHAPTER 6 Notes Cost-Volume-Profit (CVP)...

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CHAPTER 6 Notes Cost-Volume-Profit (CVP) Relationships Compiled by: Lei Wang, CPA, CFE Certain materials used with permission of J. Fergusson or of McGraw-Hill Companies, Inc.   Understanding Why CVP Analysis Is Important Useful for planning  and  making  operating  decisions. Helpful in analyzing  how  operating  incom e  (profits)  may  vary  in  relation  to chang e s  in several  key  variables:    sales price, sales volume, variable costs, fixed costs, mix of products sold. Allows  manag ers  to answer  a  very  important  question: The Basics of CVP Analysis Contribution Income Statement : (introduced  in Chapter  5) Useful as a planning tool; management can project profits at any level of activity  within the relevant range  May be reflected in total dollars, per unit, or as a ratio (%)  EXAMPLE: Last month’s  contribution  incom e  statem ent  for Smith  and  Company,  a   bicycle  manufacturer,  follows:    Total Per Unit Percent Sales ( 500 bicycles ) $250,000 $500 100% Less variable expenses 150,000 300 60
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ACCT 226 – Chapter 6 Page 2 of 11 Contribution margin 100,000 $200 40 % Less fixed expenses 80,000 Net operating income $ 20,000 Sales Volume Changes and Net Operating Income (Profit) : The  following  contribution  incom e  statem ents  are  for Smith  and   Company  for monthly  sales  of 1, 2, 400,  and  401  bicycles. Total Per Unit Percent Sales ( 1 bicycle ) $ 500 $500 100% Less variable expenses 300 300 60 Contribution margin 200 $200 40 % Less fixed expenses 80,000 Net operating income (loss) $(79,800 ) Total Per Unit Percent Sales ( 2 bicycles ) Less variable expenses Contribution margin Less fixed expenses Net operating income (loss) Total Per Unit Percent Sales ( 400 bicycles ) Less variable expenses Contribution margin Less fixed expenses Net operating income (loss) Total Per Unit Percent Sales ( 401 bicycles ) Less variable expenses Contribution margin Less fixed expenses Net operating income (loss) Note  the  following  points:
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ACCT 226 – Chapter 6 Page 3 of 11 1. The  contribution  margin  must  first cover  the  fixed  expens e s .   If it doesn’t,   there  is a   loss . 2. If Smith  sells   exactly 400 bikes a month , he  will just  break-even. 3. Each  additional  unit sold  increas e s  net  operating  incom e  by  the  amount  of  the   unit contribution margin . CVP Relationships in Graphic Form
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Chapter 6 - CHAPTER 6 Notes Cost-Volume-Profit (CVP)...

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