Unformatted text preview: eparing and Organizing Yourself
for Success in College
Management can use CVP analysis to plan future projects and to help in determining a
project’s feasibility. By altering different variables within the equation (e.g., selling price
or amount of output), managers are able to perform a what-if analysis (often referred to
as sensitivity analysis).
L.O. 2. Understand the effect of cost structure on decisions. An organization’s cost structure
is the proportion of ﬁxed and variable costs to total costs. Operating leverage is high in
ﬁrms with a high proportion of ﬁxed costs, a small proportion of variable costs, and the
resulting high contribution margin per unit. The higher the ﬁrm’s leverage, the higher
the degree of the proﬁt’s sensitivity to volume.
L.O. 3. Use Microsoft Excel to perform CVP analysis. A spreadsheet program such as
Microsoft Excel can be used to perform most CVP analyses. For example, the Goal
Seek function of Excel is designed to ﬁnd values of variables such as volume that set
other variables (for example, proﬁt) equal to a selected target value (such as zero).
L.O. 4. Incorporate taxes, multiple products, and alternative cost structures into the CVPR S I N P A R T O N E
analysis. More complicated relations among costs, volumes, and proﬁts can be analyzed.
With income taxes, the target proﬁt, which is after income taxes, has to be converted to
1 Making Yourself Successful in College
a target proﬁt before income taxes. With multiple products, an assumption about product
mix allows the application of CVP analysis by treating the multiple products as if they
are a “basket” of goods. More complicated cost structures, such as step ﬁxedCollege Reading and
2 Approaching costs, can
be analyzed by considering costs at different volumes.
Developing a College-Level Vocabulary
L.O. 5. Understand the assumptions and limitations of CVP analysis. All analysis methods
require assumptions that limit the applicability of the results. The cost analyst must
understand which assumptions are most important for the decision being made and Assignments:
3 Approaching College
consider how sensitive the decision is to the assumptions before relying on CVP
Reading Textbooks and Following Directions
analysis alone to make a decision. Key Terms
break-even point, 84
contribution margin ratio, 84
cost structure, 88
cost-volume-proﬁt (CVP) analysis, 81
margin of safety, 89
margin of safety percentage, 89 operating leverage, 88
proﬁt equation, 82
proﬁt-volume analysis, 87
total contribution margin, 82
unit contribution margin, 82 ✓ Related Resources
See pages 000 to 000
of the Annotated Instructor’s
Edition for general suggestions related to the chapters
in Part One. Review Questions
Write out the proﬁt equation and describe each term.
What are the components of total costs in the proﬁt equation?
How does the total contribution margin differ from the gross margin that is often shown on
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- Spring '07
- Contribution Margin, CVP analysis