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Chapter 6

# Chapter 6 - ACC 200 Spring 2011 Chapter 6...

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Click to edit Master subtitle style ACC 200 – Spring 2011 Chapter 6 Cost-Volume-Profit Christopher T. McKittrick CPA, MBA, CFE College of Management

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Chapter 6 – Cost-Volume-Profit Analysis ¢ Construct a contribution margin income statement and compare it to a traditional income statement ¢ Describe the relationship between activity level and contribution margin, fixed costs, and net income ¢ Describe and compute contribution margin per unit, contribution margin ratio, and operating leverage ¢ Use contribution margin and operating leverage in "what-if" analysis ¢ Calculate the breakeven point in both units and dollars ¢ Compute the breakeven point in a multiple product environment ¢ Compute the number of units and sales dollars to reach a target profit (both before and after-tax) ¢ Describe the assumptions of cost-volume-profit analysis
Introduction To CVP Cost-volume-profit (CVP) analysis focuses on the following factors: 1. The prices of products or services 2. The volume of products or services produced and sold 3. The per-unit variable costs 4. The total fixed costs

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CVP Analysis Assumptions Major assumptions of CVP analysis include: Selling price is constant throughout the entire relevant range. The amount of inventory is constant. Costs are linear throughout the relevant range. Sales mix to calculate the weighted-average contribution margin is constant. 1 2 3 4
55 Traditional Income Statement ¢ Focuses on product vs. period costs Net Sales - COGS (Fixed and Variable) Gross Margin - S,G&A Expenses (Fixed and Var.) Net Income

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Traditional Income Statement TRADITIONAL Sales Less: Cost of Goods Sold: Variable Costs Fixed Costs Total Cost of Goods Sold Gross Profit Less: SG&A Costs: Variable Costs Fixed Costs Total SG&A Costs Net Income \$1,000 350 150 \$ 500 \$ 500 \$ 50 250 \$ 300 \$ 200
Traditional Income Statements Product Companies Income Statement Dell (1/29/10) Apple (9/25/10) \$ % \$ % Sales Revenues 52,902 100.0% 65,225 100.0% Cost of Goods Sold 43,641 82.5% 39,541 60.6% Gross Profit/Margin 9,261 17.5% 25,684 39.4% Selling/General/Administrative Expenses 6,228 11.8% 5,517 8.5% Research & Development Expenses 617 1.2% 1,782 2.7% Other (Income)/Expenses 392 0.7% (156) (0.2)% Income Tax 591 1.1% 4,527 6.9% Net Income 1,433 2.7% 14,013 21.4%

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Traditional Income Statements Service Companies Income Statement Paychex (5/31/10) ADP (6/30/10) \$ % \$ % Sales Revenue 2,001 100.00% 8,928 100.00% Cost of Services 654 32.68% 4,277 47.90% Gross Margin/Profit 1,347 67.32% 4,651 52.10% Selling/General/Administrative Expenses 622 31.08% 2,121 23.80% R&D 514 5.76% All Other (Income)Expense, Net (4) (.20%) 153 1.71% Income Taxes 252 12.59% 656 7.35% Net Income 477 23.83% 1,207 13.48%
Function vs. Behavior {D13DF6B0-30 4-464 -8530-A25B357A4CE0} IONS oduct Costs Versus Period Costs) {E40D7CBF-826C-43E1-80 A-7E A81FAC A } BEHAVIOR (i.e., Variable Costs Versus Fixed Co TRADITION AL INCOME STATEMEN T CONTRIBUTIO N MARGIN INCOME STATEMENT

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Contribution Margin (CM) Income Statement ¢ Emphasizes cost behavior as opposed to cost function ¢ Expenses are categorized based on whether they are VARIABLE or FIXED ¢ CM is a useful tool that is used by managers to help make decisions!
What the heck is Contribution Margin (CM)?

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Chapter 6 - ACC 200 Spring 2011 Chapter 6...

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