CACC406 CH03


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CACC406 CH03 COST-VOLUME-PROFIT (CVP) ANALYSIS (BREAK-EVEN ANALYSIS) THE STUDY OF THE EFFECTS OF OUTPUT VOLUME ON (1) REVENUE(SALES), (2) EXPENSES(COST), (3) NET PROFIT CVP finds the following o Break-Even Point o Target Net-Profit Not-for-profit organization uses this as well – resources are not unlimited! Gives us knowledge of how cost fluctuate as volume changes helps mangers control costs To apply CVP: Classify costs as variable or fixed w/ respect to a single measure of the volume (activity level) BREAK-EVEN POINT It is the level of sales at which (revenue = expenses) and (income = 0) There are 2 ways to find the break-even point 1. Contribution Margin Approach 2. Income Statement Approach Can be used to assess possible risks by determining the safety point (margin of safety) MARGIN OF SAFETY = PLANNED UNIT SALES – BREAK-EVEN UNIT SALES o shows how far sales can far below the planned level before losses occur CONTRIBUTION-MARGIN APPROACH (P.97) IS THE SHORT-CUT OF THE INCOME STATEMENT EQUATION Contribution Margin is the marginal profit per unit sale o When contribution-margin % is low, great increases in volume are necessary before significant increases in net profits can occur (company are less willing to spend a great amount on advertising) o As sales exceed the break-even point, a high contribution-margin % increases profits faster than does a samall contribution margin % o Can be expressed as a (total/unit absolute amount), a ratio, and a percentage Contribution ratio of 20% implies that variable-cost ratio = 80% Variable-cost ratio = variable cost % = all variable costs divided by sales INCOME-STATEMENT EQUATION APPROACH (P.98) NET INCOME = SALES – VARIABLE EXPENSES – FIXED EXPENSES = (unit sales x no. of units) – (unit variable cost x no. of units) – (fixed expenses)
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CACC406 CH03 = (no. of units)(unit sales – unit variable) – (fixed expenses) At Break-Even Point, Net Income = 0 That means: sales – variable expenses – fixed expenses = 0 (Now: Solve for the wanted values) Variable-cost ratio or percentage = (variable cost per unit) / (sales price per unit) o This is another method to solve for sales dollar without computing the unit break-even point CVP/BREAK-EVEN POINT – GRAPH STEP 1: Draw the axis Horizontal = sales units Vertical = sales and cost
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