Notes_Chapter_06 - Chapter 6 Cost-Volume-Profit...

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Chapter 6: Cost-Volume-Profit Relationships I. Cost-Volume-Profit Analysis. A. What is it? 1. Cost-Volume-Profit (CVP) analysis is the study of the effects of changes in costs and volume on a company’s profits. “What-If Analysis” it is an important profit planning tool It is also useful in setting selling prices, determining product mix, and maximizing use of production facilities. 2. CVP analysis considers the inherent interrelationships among the following: a.Volume or level of activity. b.Unit selling prices. c.Variable cost per unit. d.Total fixed costs. e.Sales mix. 3. Assumptions underlying CVP analysis: - Costs and revenues are linear throughout the relevant range. - Costs can be classified as either variable or fixed with reasonable accuracy. - All units produced are sold. - the sales mix will remain constant 1
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B. CVP Income Statement. 1.The CVP income statement classifies costs as variable or fixed and computes a contribution margin. 2. Contribution margin=Revenues minus variable costs--it can be stated as a total amount, a per unit amount or as a ratio. a.Total Contribution Margin = Total Sales – Total Variable Costs b.Contribution Margin per Unit = Unit Selling Price – Unit Variable Costs c.Contribution Margin Ratio = Contribution Margin/unit ÷ Sales Price/unit C. Definitions: Breakeven Point - the level of sales where the company will realize no income and will suffer no loss; REVENUES=TOTAL COSTS on a CVP graph, it is where the total-cost line intersects the total-revenue line. 2
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2. Target Net Income is the profit objective for individual product line. 3. Margin of safety - the difference between actual or expected sales and breakeven sales. a.Margin of Safety in Dollars = b.Margin of Safety Ratio = D. BASIS for CVP Analysis: Revenues = Variable Costs + Fixed Costs + Desired Profit 1) Equation Method 2) Contribution Margin Method 3) Contribution Margin Ratio Approach 3
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EXAMPLE 1 - CVP Analysis Choco, Corp. manufactures boxes of chocolate candies. Its basic cost and profit information is summarized below: Selling price (per box) $ 8.00 Variable cost (per box)
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Notes_Chapter_06 - Chapter 6 Cost-Volume-Profit...

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