BUS 254 chapter 7 notes

# BUS 254 chapter 7 notes - Cost-Volume-Profit(CVP analysis...

This preview shows pages 1–2. Sign up to view the full content.

Cost-Volume-Profit (CVP) analysis focuses on: Prices of products Volume or level of activity Per unit variable costs Total fixed costs Mix of products sold The focus on per unit figures are very important in CVP analysis Contribution Margin Sales – Variable Expenses If CM > fixed expense Operating income If CM < fixed expense Operating Loss If CM = fixed expense Break even! Break-even point = level at which profits is 0, or total sales equal total expenses, or CM equals total fixed expenses INCREASE IN CM = PROPORTIONAL INCREASE IN OPERATING INCOME So increased # of units sold X CM = expected increase in income Cost-volume-profit graph Horizontal axis = unit volume Vertical axis = dollars 1) Draw horizontal line representing fixed expense 2) Pick any unit volume and calculate total expense (fixed + variable) 3) Use the point in 2) and draw a line from that point to where fixed expense intersects vertical axis 4) Pick any unit volume and calculate total sales (sales per unit X unit volume) 5) Use the point in 4) and draw a line from that point to the origin Intersecting point = break even point! Contribution Margin (CM) Ratio CM ratio = Contribution Margin / Sales Either do it by total cost or per unit cost Tells us that for each dollar increase in sales, the CM will increase by how much This increase in CM will lead to increase in profit (fixed cost constant) Application: Suppose sales is originally \$100,000, variable expense is \$60,000, and fixed expense is \$35,000 Contribution margin is \$40,000 and CM ratio = 40% Now if increase in advertising by \$10,000 will increase sales by \$30,000, should company do it?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern