Cost-Volume-Profits (CVP) Relationships

Cost-Volume-Profits (CVP) Relationships -...

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Cost-Volume-Profit (CVP) Relationships I. CVP: a powerful tool that helps mangers understand the relationships among cost, volume, profit; focuses on how profits are affected by the following a. Selling prices b. Sales volume c. Unit variable cost d. Total fixed costs e. Mix of products sold II. The basic of CVP Analysis a. Contribution margin: a.i. Sales revenue – variable expenses a.ii. Used first to cover the fixed cost and whatever remains goes to profit a.iii. Break-even point: level of sales at which profit equals zero b. CVP Relationship in Equation fom b.i. Profit = (sales revenue – variable expense) – fixed expenses b.i.1. If company has only single product b.ii. Sales = selling price per unit * quantity sold = P * Q b.iii. Variable Expense = variable expense per unit * quantity sold = V*Q b.iv. Profit = ((P * Q) – (V*Q)) – fixed expenses c. CVP relationships in graphic form c.i. CVP Graph: highlights CVP relationships over wide ranges of activity c.ii. Preparing the CVP graph (aka break-even chart) c.iii.
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