This preview shows pages 1–3. Sign up to view the full content.
CACC406 CH03
COSTVOLUMEPROFIT (CVP) ANALYSIS
(BREAKEVEN
ANALYSIS)
•
THE STUDY OF THE EFFECTS OF OUTPUT VOLUME ON (1)
REVENUE(SALES),
(2)
EXPENSES(COST),
(3)
NET PROFIT
•
CVP finds the following
o
BreakEven Point
o
Target NetProfit
•
Notforprofit 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)
BREAKEVEN POINT
•
It is the level of sales at which (revenue = expenses) and (income = 0)
•
There are 2 ways to find the breakeven 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 – BREAKEVEN UNIT SALES
o
shows how far sales can far below the planned level before losses occur
CONTRIBUTIONMARGIN APPROACH (P.97)
•
IS THE SHORTCUT OF THE INCOME STATEMENT EQUATION
•
Contribution Margin
is the marginal profit per unit sale
o
When contributionmargin % 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 breakeven point, a high contributionmargin % 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 variablecost ratio = 80%
Variablecost ratio = variable cost % = all variable costs divided by sales
INCOMESTATEMENT 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)
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentCACC406 CH03
= (no. of units)(unit sales – unit variable) – (fixed expenses)
•
At BreakEven Point, Net Income = 0
That means:
sales – variable expenses – fixed expenses = 0 (Now:
Solve for the wanted
values)
•
Variablecost 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 breakeven point
CVP/BREAKEVEN POINT – GRAPH
STEP 1:
Draw the axis
•
Horizontal
= sales units
•
Vertical
= sales and cost
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '09
 Unknown
 Managerial Accounting, Revenue

Click to edit the document details