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AFM102January262011

AFM102January262011 - Introduction to Management Accounting...

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Click to edit Master subtitle style 5/11/11 © Anthony Atkinson and Patrick Connolly Introduction to Management Accounting AFM 102 January 26, 2011 Cost Volume Profit Analysis 11

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5/11/11 © Anthony Atkinson and Patrick Connolly Key Topics in Today’s Class Cost Volume Profit (CVP) Analysis The CVP equation The CVP graph Breakeven analysis Target profit analysis Opportunity costs 22
5/11/11 © Anthony Atkinson and Patrick Connolly CVP Assumptions The basic cost volume profit (CVP) model makes the following important assumptions: Sales volume does not affect product price. Sales volume does not affect variable cost per unit. All costs are either variable or fixed. All production is sold. 33

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5/11/11 © Anthony Atkinson and Patrick Connolly Developing the CVP Equation Let: P = price per unit V = variable cost per unit F = total fixed cost x = number of units produced and sold OI = operating income Revenues - costs = operating income 44
5/11/11 © Anthony Atkinson and Patrick Connolly Rearranging the CVP Equation Accountants call price per unit minus variable cost per unit (P – V) the contribution margin per unit. We can now write the above 55 unit per margin on contributi income operating cost fixed x + =

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5/11/11 © Anthony Atkinson and Patrick Connolly Rearranging the CVP Equation We can convert this equation to revenue by multiplying both sides of the equation by the price per unit 66 unit per margin on contributi income) operating cost (fixed * p px + = p unit per margin on contributi income) operating cost (fixed px + = ratio margin on contributi income) operating cost (fixed px + =
5/11/11 © Anthony Atkinson and Patrick Connolly The CVP Chart Consider Vista Company Price Per unit - \$10.00 Variable Cost per unit - \$3.25 Fixed Costs -\$1,000,000 77

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5/11/11 © Anthony Atkinson and Patrick Connolly 88 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 0 2 4 6 8 10 12 CVP Chart Units Dollars
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