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Chapter 7 - Cost-Volume-Profit

# Chapter 7 - Cost-Volume-Profit - 7-1 MGT223...

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Chapter Seven MGT223 Cost-Volume-Profit Relationships Learning Objective 1 Explain how changes in Explain how changes in activity affect contribution activity affect contribution margin and operating margin and operating income. Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from sales revenue after have been deducted.

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Basics of Cost-Volume-Profit Analysis CM is used first to cover fixed expenses. Any remaining CM contributes to . The Contribution Approach Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If Racing sells an additional bicycle, \$200 additional CM will be generated to cover fixed expenses and profit. The Contribution Approach Each month, Racing must generate at least \$80,000 in total CM to break even.
The Contribution Approach If Racing sells 400 units 400 units in a month, it will be operating at the break-even point . The Contribution Approach If Racing sells one more bike ( 401 bikes ), net operating income will increase by \$200 . Learning Objective 3 Use the contribution Use the contribution margin (CM) ratio to margin (CM) ratio to compute changes in compute changes in contribution margin and contribution margin and operating income resulting from changes in sales from changes in sales volume.

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Contribution Margin Ratio The contribution margin ratio is: For Racing Bicycle Company the ratio is: Total CM Total sales CM Ratio = Each \$1.00 increase in sales results in a
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