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BMGT221 Chapter 7 Review

BMGT221 Chapter 7 Review - BMGT221 A G Pfeiffer Chapter 7 1...

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BMGT221 G. Pfeiffer Chapter 7 A. How Does Cost-Volume Profit Analysis Help Managers? o Cost-Volume-Profit Analysis – expresses the relationship between costs, volume and profit or loss Data Required for Effective CVP Analysis o CVP data relies on the interdependency of 5 components: a. Sales price b. Volume c. Variable costs d. Fixed costs e. Profit or loss o How changes in any of the components will affect their business CVP Assumptions o CVP analysis assumes the following: a. A change in volume is the only factor that affects costs b. Managers can classify each cost (or the components of mixed costs) as either variable or fixed. These costs are linear throughout the relevant range of volume c. Revenues are linear throughout the relevant range of volume d. Inventory levels wont change e. The sales mix of products wont change Sales Mix  – combination of products that make up total sales The Unit Contribution Margin o Contribution Margin Income Statement – separates costs by behavior rather than function a. Information for the CVP analysis is presented in a “ready-to-use” format o Contribution Margin  – tells managers how much revenue is left after paying variable expenses a. CM = Excess of SR / Variable Expenses b. Stated as a total amount on the CM income statement o Contribution Margin per unit  – indicate how much profit each unit provides before fixed costs are considered a. aka unit contribution margin b. Some businesses pay sales commission on each unit or have other variable expenses (i.e. shipping) c. CM per unit = SR per unit – Variable Cost per unit Sales Price per poster..………………………………………. \$35 Less: Variable Cost per poster….…………………………… (21) Gross Profit…………….……………………………………. \$14 o Managers can use the unit CM to forecast income at any volume within their relevant range 1

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2 CM Margin (650 posters x \$14 per poster)…………………. \$9,100 Less: Fixed Expenses.…….………………………………… (7,000) Operating Income….….……………………………………. \$2,100 The Contribution Margin Ratio o Contribution Margin Ratio – ratio of Contribution Margin to Sales Revenue o
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BMGT221 Chapter 7 Review - BMGT221 A G Pfeiffer Chapter 7 1...

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