Chapter 3BB

# Chapter 3BB - CHAPTER 03 Chapter Outline...

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CHAPTER 03

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Chapter Outline Cost-Volume-Profit (CVP) Analysis What is CVP analysis? Breakeven Point What? How? Contribution margin Equation Graph Applications Target profit Margin of Safety Changes and sensitivity Analysis
Cost-Volume-Profit Analysis (CVP) It is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit). What is cost-volume-profit analysis?

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Sales Less: variable expenses Contribution margin Less: fixed expenses Net income Cost-Volume-Profit Analysis (CVP) Contribution Income Statement
The Break-Even Point The break-even point is the volume of activity where the organization’s revenues and expenses are equal. Sales 250,000 \$ Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses Net income - NI = 0 2 Relations?

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The Break-Even Point The break-even point is the volume of activity where the organization’s revenues and expenses are equal. Sales 250,000 \$ Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses Net income - NI = 0
The Break-Even Point The break-even point is the volume of activity where the organization’s revenues and expenses are equal. Sales 250,000 \$ Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses Net income - NI = 0

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Contribution margin Equation Break-Even Point Techniques The break-even point is the point where total revenue equals total costs (both variable and fixed). Unit CM CM Ratio
Contribution Margin Method Break-even volume in units = Fixed costs Contribution margin per unit BEP (dollars) = BEP (units) x Selling Price

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Contribution Margin Method BEP (units) = BEP (dollars) / Selling Price Break-even in dollars = Fixed costs Contribution margin ratio
Contribution Margin Method BEP (units) = BEP (dollars) / Selling Price Break-even volume in units = Fixed costs Contribution margin per unit Break-even in dollars = Fixed costs Contribution margin ratio BEP (dollars) = BEP (units) x Selling Price

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Example Bright Day is considering the introduction of a new Bright Day expects to incur \$24,000 in fixed marketing costs in connection with Multi Minerals. Let’s calculate the break-even point in units and dollars. Sales revenue per unit 20 \$ 100% Variable cost per unit 12 60% Contribution margin per unit
Example Break-even in Units Fixed costs CM per unit = units Break-even in Dollars Fixed costs CM ratio = \$ Let’s Proof it!!!

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Example Units \$ Total Sales revenue 3,000 20 \$ Variable cost 3,000 12 Contribution margin 3,000 8 \$ Fixed Cost Net Income 0 Here is the proof BEP NI = 0?
Check Yourself Matrix, Inc. manufactures one model of lawnmower the sells for \$175 each. Variable expenses to produce the lawnmower are \$100 per unit. Total fixed costs are \$225,000 per month. Use the contribution method to determine how many lawnmowers Matrix must sell next month: 1. 3,000.

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## This note was uploaded on 02/22/2012 for the course BUAD 2050 taught by Professor Nicholasw.schroeder during the Spring '09 term at Toledo.

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Chapter 3BB - CHAPTER 03 Chapter Outline...

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