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201-wk7-CVP-S'12 (STUD)

# 201-wk7-CVP-S'12 (STUD) - Mgmt 201 Managerial Accounting...

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Chap. 8 - page 1 Mgmt. 201 – Managerial Accounting – Week 7 Cost Volume Profit (CVP) Model Predicting a firm’s earnings Professor Thoman page 2 Part 2 of the course – DECISION MAKING A. Making the decision: Using the accounting information to make good choices. How does a manager make informed decisions that will increase the firm’s profits? B. Budgeting: Planning for the effect of the firm’s decisions on the firm’s operations and earnings. Given the company’s decisions, how much income can the company expect to earn? What are the company’s targets? C. Performance evaluation: Evaluating the impact of the decisions and making revisions. How well did the company do relative to its targets and budgets? Why were targets or goals not attained? What changes should the company make?

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page 3 Overview of Chapter 7 – CVP Model In Chapter 7 we will, I. Derive the Cost-Volume-Profit (CVP) model for a firm producing a single product and show how the CVP model provides a simple method of estimating how much profits a company will earn. II. Show how the Cost-Volume-Profit model gives managers tools to help them make better decisions: Break-even analysis Attaining a target level of income Forecasting income; “what-if” analysis III. Study the Cost-Volume-Profit Model when sales dollars are used as the measure of production. IV. Study the Cost-Volume-Profit Model when the firm produces multiple products. page 4 Basic one-product CVP model Cost-Volume-Profit (CVP) model in numbers of units sold NI = (P – V)X – F Total contribution margin or contribution margin (CM or TCM) = Sales – Total variable costs = (P – V)X Contribution margin per unit (CM/unit) = P - V In general, what does the contribution margin per unit measure?
page 5 Break-even analysis - Problem Deere & Company ( www.deere.com ), “founded in 1837, grew from a one-man blacksmith shop into a worldwide corporation that today does business in more the 160 countries and employs approximately 43,000 people world wide.” Deere & Company manufactures machines for farming, construction, earthmoving, forestry and residential uses. Suppose Deere wants to use the CVP model to determine the break-even point at each plants. (All information is hypothetical and is provided in thousands of dollars.): Excavators at Davenport, Iowa Seeders at Moline, Illinois Lawn tractors at Greeneville, Tenn. Selling price \$ 800 \$ 350 \$ 125 DM 125 65 20 DL 80 40 10 VOH (50% of DL\$) 40 20 5 Variable cost per unit \$ 245 \$ 125 \$ 35.0 FOH: Davenport (300% of DL\$) 240 Moline (150% of DL\$) 60 Greeneville (175% of DL\$) 17.5 TOTAL UNIT COST \$ 485 \$ 185 \$ 52.5 Current production rate per day 5 25 80 page 6 At each plant the VOH and FOH are allocated based on the direct labor dollars in the product. At all plants the VOH rate is 50% of the direct labor cost; the FOH rates differ and are listed in the above table. It is estimated that there are 240 working days in each plant per year.

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