CHAPTER 3.pdf - CHAPTER 3 COSTu2013VOLUMEu2013PROFIT...

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3-1 CHAPTER 3 COST VOLUME PROFIT ANALYSIS NOTATION USED IN CHAPTER 3 SOLUTIONS SP: Selling price VCU: Variable cost per unit CMU: Contribution margin per unit FC: Fixed costs TOI: Target operating income 3-1 Define cost volume profit analysis. Cost-volume-profit (CVP) analysis examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, selling price, variable cost per unit, or fixed costs of a product. 3-2 Describe the assumptions underlying CVP analysis. The assumptions underlying the CVP analysis outlined in Chapter 3 are 1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units sold. 2. Total costs can be separated into a fixed component that does not vary with the units sold and a variable component that changes with the number of units sold. 3. When represented graphically, the behaviors of total revenues and total costs are linear (represented as a straight line) in relation to number of units sold within a relevant range and time period. 4. The selling price, variable cost per unit, and fixed costs are known and constant. 3-3 Distinguish between operating income and net income. Operating income is total revenues from operations for the accounting period minus cost of goods sold and operating costs (excluding income taxes): Operating income = Total revenues from operations Costs of goods sold and operating costs (excluding income taxes) Net income is operating income plus nonoperating revenues (such as interest revenue) minus nonoperating costs (such as interest cost) minus income taxes. Chapter 3 assumes nonoperating revenues and nonoperating costs are zero. Thus, Chapter 3 computes net income as: Net income = Operating income Income taxes 3-4 Define contribution margin, contribution margin per unit, and contribution margin percentage.