# wk3_ch3n - Ch 3 C ost-Volum-Profit(C e VP Analysis Le ad-in...

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Ch 3: Cost-Volume-Profit (CVP) Analysis

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Lead-in example: CVP analysis You are planning to open a coffee shop in Center City. You plan to charge \$1.85 for a cup of coffee (ignore food/fancy drinks for simplicity). Your cost estimates are as follows: variable costs: \$0.25 per cup (coffee beans, paper cups, etc) fixed costs: \$17,600 per month (rent \$6,000, staff salaries \$8,000, utilities \$1,600, depreciation \$2,000) Questions: 1) How much is your operating income (loss) if you sell 5,000 cups/month? “ “ “ ” “ “ 15,000 cups/month? 2) How much do you need to sell to break even (zero operating income)? 3) How much do you need to sell to make a (pre-tax) operating income of \$8,000/mth? 4) You’re thinking of offering free Wi-Fi. If you offer Wi-Fi, it will cost you \$100/ mth in additional fixed costs, but it will increase your sales by 90 cups a month. Should you offer free Wi-Fi?
Vocabulary Gross Margin = Revenue- Cost of goods sold. All COGS are manufacturing costs. Some COGS are fixed costs. GM ratio = GM / Revenue Contribution margin = Revenue- Variablecosts Some VC aremanufacturing costs, but somemay be non-manufacturing costs. No VC arefixed. CM ratio (percentage) = CM / Revenue

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Gross margin Gross Margin = Revenue – COGS Cost of goods sold =Direct materials Direct labor Applied overhead Overheads areusually mixed costs and include some fixed components
Contribution margin Contribution margin = Revenue – all VCs All Variable costs = manufacturing VC + non- manufacturing VC Given enough information, we can calculate gross margin from contribution margin, and vice-versa

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Contribution Margin vs.
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