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Unformatted text preview: CostVolumeProfit Analysis CostVolumeProfit Analysis What is C V P ? Cost Volume Profit CVP studies the relations among revenue, cost, and volume and their effect on profit. Assumptions of CVP Analysis Assumptions of CVP Analysis 1. The analysis assumes a linear revenue function and a linear cost function. 2. The analysis assumes that price, total fixed costs, and unit variable costs can be accurately identified and remain constant over the relevant range. 3. The analysis assumes that what is produced is sold. 4. For multipleproduct analysis, the sales mix is assumed to be known. 5. The selling price and costs are assumed to be known with certainty. The Profit Equation The Profit Equation Operating profit equals total revenue less total costs. Its the income statement written horizontally. Operating profit Total revenues Total costs Operating profit Total revenues Total costs T R TC The Income Statement The Profit Equation Profit Equation Continued Profit Equation Continued T R P X VX F TC T R Price Units of output produced and sold P X TC Variable costs per unit Units of output Fixed costs X F V UDevelop; an Example UDevelop; an Example Income Statement Month of March 200X Operating profit $1,38 Total Per Unit Less Variable cost of goods sold 3,600 0.30 Sales $7,200 $0.60 UDevelop Developed 12,000 prints in March 2,880 Contribution margin 0.24 Less Fixed costs 1,500 720 Less Variable selling cost 0.06 Profit Equation Example Profit Equation Example P V F X $.30 + $.06 $1,380 $2,880 $1,500 $1,380 UDevelop $1,380 $.60 $.36 $1,500 12,000 units [ ] Contribution Margin Contribution Margin The difference between total revenue and total variable costs.variable costs....
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 Spring '11
 Craig

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