CHAPTER_7_-_B - 61 BasicsofCostVolumeProfit The...

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Basics of Cost-Volume-Profit  Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. Sales (500 bicycles) 250,000 $ Less: Variable expenses 150,000 Contribution margin 100,000 Less: Fixed expenses 80,000 Net operating income 20,000 $ Racing Bicycle Company Contribution Income Statement For the Month of June The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behavior. 6-1
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Basics of Cost-Volume-Profit  Analysis CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income. 6-2
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Per Unit Sales (500 bicycles) $ 500 Less: Variable expenses 300 Contribution margin 100,000 200 $ Less: Fixed expenses 80,000 Net operating income 20,000 $ The Contribution Approach Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If RBC sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses and profit. 6-3
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Total Per Unit 250,000 500 $ 150,000 300 100,000 200 $ Less: Fixed expenses 80,000 Net operating income 20,000 $ Racing Bicycle Company Contribution Income Statement For the Month of June The Contribution Approach Each month, RBC must generate at least $80,000 in total contribution margin to break-even (which is the level of sales at which profit 6-4
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Total Per Unit Sales ( 400 bicycles) 200,000 $ 500 $ Less: Variable expenses 120,000 300 Contribution margin 80,000 200 $ Less: Fixed expenses Net operating income - $ Racing Bicycle Company Contribution Income Statement For the Month of June The Contribution Approach If RBC sells 400 units in a month, it will be operating at the break-even point . 6-5
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Per Unit Sales ( 401 bicycles) 200,500 $ 500 Less: Variable expenses 120,300 300 Contribution margin 80,200 200 Less: Fixed expenses 80,000 Net operating income 200 $ The Contribution Approach If RBC sells one more bike ( 401 bikes ), net operating income will increase by $200 . 6-6
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CVP Relationships in Equation  Form The contribution format income statement can be expressed in the following equation: Profit = (Sales – Variable expenses) – Fixed expenses Total Per Unit Sales ( 401 bicycles) 200,500 $ 500 $ Less: Variable expenses 120,300 300 Contribution margin 80,200 200 $ Less: Fixed expenses 80,000 Net operating income 200 $ Racing Bicycle Company Contribution Income Statement For the Month of June 6-7
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CVP Relationships in Equation  Form This equation can be used to show the profit RBC earns if it sells 401 units. Notice, the answer of $200 mirrors our earlier solution. 401 units × $500 401 units × $300 $80,000 Profit = ( $200,500 – Variable expenses) – Fixed Profit = ($200,500 – $120,300) – Fixed expenses Profit = ($200,500 – $120,300) – $80,000 $200 = ($200,500 – $120,300) – $80,000 Profit = (Sales – Variable expenses) – Fixed expenses 6-8
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CVP Relationships in Equation  Form Unit CM = Selling price per unit – Variable expenses per unit It is often useful to express the simple profit equation in terms of the unit contribution margin (Unit CM) as follows: Profit = (P × Q – V × Q) – Fixed expenses Profit = (P – V) × Q – Fixed expenses Profit = Unit CM × Q – Fixed expenses Unit CM = P – V 6-9
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CVP Relationships in Equation 
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This note was uploaded on 08/10/2011 for the course ECON 123 taught by Professor Other during the Spring '11 term at Pontificia Universidad Catolica Madre y Maestra.

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CHAPTER_7_-_B - 61 BasicsofCostVolumeProfit The...

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