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Unformatted text preview: t equation to explicitly include volume, allowing us to analyze the relations among volume, costs, and proﬁt. Total revenue (TRand Organizing price per
Preparing ) equals average selling Yourself
unit (P) times the units of output (X):
Total revenue for Success in College
Units of output produced and sold Price TR PX In our proﬁt equation, total costs (TC) may be divided into a ﬁxed component that
does not vary with changes in output levels and a variable component that does vary. The
ﬁxed component is made up of total ﬁxed costs (F) per period; the variable component is
the product of the average variable cost per unit (V) multiplied by the quantity of output
(X). Therefore, the cost function is
Total costs (Variable costs per unit TC VX Units of output) Fixed costs F HAPT
RS
PART
Substituting the expanded expressions in the proﬁtCequationE yieldsI aN form more O N E
useful for analyzing decisions: Making Yourself
Total1revenue Total costs Successful in College Proﬁt TR TC VX 2 F Approaching College Reading and
Developing a CollegeLevel Vocabulary TC
Therefore, Proﬁt 3PX Approaching College Assignments:
(VX F) Reading Textbooks and Following Directions Collecting terms gives
Proﬁt (Price
(P unit contribution margin
Difference between revenues
per unit (price) and variable
cost per unit.
total contribution
margin
Difference between revenues
and total variable costs. Variable costs) V)X Fixed costs F We deﬁned contribution margin in Chapter 2 as the difference between the sales
price and the variable cost per unit. We will refer to this as the unit contribution margin
to distinguish it from the difference between the total revenues and total variable cost,Related Resources
✓ the
total contribution margin. In other words, the total contribution margin is the unit con 000 to 000
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tribution margin multiplied by the number of units (Price Variable costs) Uof the Annotated Instructor’s
nits of
output, or (P V)X. It is the amount that units sold contribute toward (1) covering ﬁxed general suggesEdition for
costs and (2) providing operating proﬁts. Sometimes we use the contribution margin,related to the chapters
tions in
total, as in the preceding equation. Other times, we use the contribution margin per Part One.
in unit,
which is
Price
P
1 Variable cost per unit 1 V We adopt the simplifying assumption that production volume equals sales volume so that changes in
can be ignored in this chapter. cor50782_ch01_001072.indd inventory
1 lan27114_ch03_080109.indd 82 Units of output 10/5/09 11:09:29 PM 10/22/09 10:33:53 PM REVISED PAGES Chapter 3 Fundamentals of CostVolumeProfit Analysis 1 83 Recall from Chapter 2 that an important distinction for decision making is whether
costs are ﬁxed or variable. That is, for decision making, P Aare concerned about cost
we R T
behavior, not the ﬁnancial accounting treatment, which classiﬁes costs as either manufacturing or administrative. Thus, V is the sum of variable manufacturing costs per unit and
variable marketing and administrative costs per unit; F is the sum of total ﬁxed manufacturing costs and ﬁxed m...
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 Spring '07
 MEJIAS

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