chapter_3

Orientation cvp example when jamaal rst opened u

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Unformatted text preview: arketing and administrative costs for the period; and X refers to the number of units produced and sold during the period. Orientation CVP Example When Jamaal first opened U-Develop, he offered one service only, developing prints. He charged an average price of $.60. The average variable cost of each print was $.36, computed as follows: Preparing and Organizing Yourself Cost of processing (materials and labor) . . . . . . . . . . . . . . . . . . . . . for Success $.30College in Other costs (sales and support). . . . . . . . . . . . . . . . . . . . . . . . . . . . .06 Average variable cost per print. . . . . . . . . . . . . . . . . . . . . . . . . . . $.36 The fixed costs to operate the store for March, a typical month, were $1,500. In March, U-Develop processed 12,000 prints. The operating profit can be determined from the company’s income statement for the month, as shown in Exhibit 3.1. As a manager, Jamaal might want to know how many units (prints) he needs to sell in order to achieve a specified profit. Assume, for example, that Jamaal is hoping for sales to improve in July, when the weather will improve and people take vacations. Given the data, price $.60, variable cost per unit $.36 (therefore, contribution margin per unit $.24), and fixed costs $1,500, the manager asks two questions: What volumeS is I N P A R T O N CHAPTER required to break even (earn zero profits)? What volume is required to make an $1,800 operating profit? Although we could use the income statement and guess at the answer to 1 M the cost-volume-profit these questions, it is easier to set up an equation that summarizesaking Yourself Successful in College relation. Recall that in March, U-Develop processed 12,000 prints. Using the profiCollege Reading and 2 Approaching t equation, the results for March, therefore, were: E Developing a College-Level Vocabulary Profit Contribution margin (P V )X ($.60 $.36) F Fixed costs 3 Approaching College Assignments: 12,000 prints Reading Textbooks and Following Directions $1,500 $1,380 which is equal to the operating profit shown on the income statement in Exhibit 3.1. To simplify the equation, we use the term “Profit” in the equation to mean the same thing as “Operating Profit” on income statements. Exhibit ✓ Related Resources 3.1 U-DEVELOP Income Statement March Sales (12,000 prints at $.60) . . . . . . . . . . . . . . . . . . . . . . . Less Variable costs of goods sold (12,000 $.30) . . . . . . . . . Variable selling costs (12,000 $.06) . . . . . . . . . . . . . . . See pages 000 Income Statement to 000 $7,200 $3,600 720 4,320 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,880 1,500 Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. 1 $1,380 cor50782_ch01_001-072.indd 1 lan27114_ch03_080-109.indd 83 10/5/09 11:09:29 PM 10/22/09 10:33:53 PM REVISED PAGES Part II 84 Cost Analysis and Estimation 1 Finding Break-Even and Target Volumes We can use t...
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