Extensions of CVP Model Notes.docx - Extensions of CVP...

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Extensions of CVP Model Background: The basic CVP model we have studied previously can be extended or modified to incorporate complications. These may include: 1. Effect of I.T. 2. 3. Complicated tax structure Income Taxes: When calculating break-even and target profit in the past, we always used ___Before Tax______ . Since income is taxable for most companies, they often are interested in an _________ ______ calculation. We can find the target volume as follows: To find the target profit in dollars, you should divide by the ____________ ______ ______ instead of the unit contribution margin. It may be easier to break this equation down into two parts. STEP 1: Convert the after-tax profit target to before-tax profit: BTP = ATP / (1-tax rate) STEP 2: Calculate the target volume as in the past using the before-tax profit: Target volume = Fixed costs + BTP / Unit CM Example: High Desert Campgrounds (HDC) rents spaces for recreational vehicles (RVs) by the day. HDC charges $15 per day for a

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