Ch 7 CVP_Lecture 1-students

# Ch 7 CVP_Lecture 1-students - Cost-Volume-Profit Chapter 7...

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Copyright © 2010 School of Accountancy, Arizona State University Chapter 7 Cost-Volume-Profit Please pick up handout in the back of the room

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Copyright © 2010 School of Accountancy, Arizona State University Cost-Volume-Profit (CVP) Analysis CVP analysis is a method for analyzing how operating decisions and marketing decisions affect profit CVP relies on an understanding of the relationship between variable costs, fixed costs, unit selling price, and output level (volume) Operating Income Sales price per unit Fixed costs Variable cost per unit Units sold If you know or can estimate four of these five components, you can compute the remaining unknown amount
Copyright © 2010 School of Accountancy, Arizona State University Assumptions of CVP A limited range of activity, called the relevant range , where total cost and total revenue changes are linear. All costs can be described as either fixed or variable. Changes in total costs are due to changes in activity. Production and sales are equal, so that inventory levels remain constant. Multiproduct companies maintain a constant sales mix.

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Copyright © 2010 School of Accountancy, Arizona State University The Contribution Format Comparison of the Contribution Income Statement with the Traditional Income Statement Traditional Approach Contribution Approach (costs organized by function) (costs organized by behavior) Sales 100,000 \$ Sales 100,000 \$ Less cost of goods sold 70,000 Less variable expenses 60,000 Gross Margin 30,000 \$ Contribution margin 40,000 \$ Less operating expenses 20,000 Less fixed expenses 30,000 Operating Income 10,000 \$ Operating Income 10,000 \$ Contribution margin is the amount by which revenue exceeds variable costs.
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Ch 7 CVP_Lecture 1-students - Cost-Volume-Profit Chapter 7...

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