Chapter 6 Notes

Chapter 6 Notes - Chapter 6: Cost-Volume-Profit Analysis:...

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Chapter 6: Cost-Volume-Profit Analysis: Additional Issues CVP Review: As noted in Chapter 5, CVP analysis is: o the study of the effects of changes in costs and volume on a company’s profit CVP analysis is important to profit planning CVP analysis is critical in management decisions such as: o determining product mix, o maximizing use of production facilities, o setting selling prices Basic Concepts o Because CVP is so important, management often wants the information reported in a special format income statement. o The CVP income statement is for internal use only, classifies costs and expenses as fixed or variable, reports a contribution margin in the body of the statement. o Contribution margin – amount of revenue remaining after deducting all variable costs o The contribution margin is often reported as a total amount and on a per unit basis. Sales Mix: When a company sells more than one product It is important to understand its sales mix The sales mix is the relative percentage in which a company sells its products. If a company’s unit sales are 80% printers and 20% computers, its sales mix is 80% to 20%. Sales mix is important because different products often have very different contribution margins. Break-Even Sales in Units: A company can compute break-even sales for a mix of two or more products by determining the:
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Weighted-average unit contribution margin of all products o The weighted-average unit contribution margin is the sum of the weighted contribution margin of each product Assume that Vargo Company sells two products and has the following sales mix and related information: First, determine the weighted-average contribution margin for Vargo’s two products:
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Chapter 6 Notes - Chapter 6: Cost-Volume-Profit Analysis:...

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