201-wk7-CVP-F'10

201-wk7-CVP-F'10 - Mgmt. 201 - Managerial Accounting Week...

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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 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 two tools to help them make better decisions: Break-even analysis Attaining a target level of income 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 Uses of the CVP model Firms have lots of uses for a model that can predict profits for the company: 1. Local tanning salon needs to know number of tanning sessions must be purchased to break-even. 2. Macy’s may want to estimate the fee they need to charge for shipping to allow the company to break-even on their shipping and handling functions. Even non-profits may need a model to predict their costs and income: 3. Purdue may want to know how many students it must admit to ensure that the budget is balanced.
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Simple one product model Pacific Caps and Bags ( www.pacificcaps.com ), established in 1997, is a manufacturer of ball caps, duffel bags, backpacks, etc. Suppose one division of Pacific Caps and Bags makes only ball caps. As with many companies, Pacific would like to estimate the profits that its ball cap division can earn. Hence, let us write a “formula” or model to predict income: Definitions: NI = Net income TR = Total revenues TC = Total costs P = Selling price for each cap X = Number of caps sold V = Variable costs per cap F = Total fixed costs page 6 Simple one product 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 Shoe example: If shoes can be sold for $100 per pair and variable costs are $30 per pair, what is the contribution margin per unit? In general, what does the contribution margin per unit measure?
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201-wk7-CVP-F'10 - Mgmt. 201 - Managerial Accounting Week...

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