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Unformatted text preview: ganization—such as a product line or program. A CVP analysis thus begins with the basic equation for profit: Profit = Total revenue (TR) - Total costs (TC) Total revenue for many activities is quite easy to calculate. If we assume that an organization's price is represented by the letter p and its volume by the letter x, then total revenue is price times volume, or: TR = px Total costs are somewhat more complicated. CVP analysis requires a recognition of the different types of cost behavior: fixed, step-function, variable, and semi-variable. Let us begin with the simplest of cases, in which there are no step-function or semi-variable costs. In this instance, the formula would be quite simple: Total costs = Fixed costs + Variable costs As before, fixed costs are represented by the letter a, and variable costs per unit by the letter b. Thus, total variable costs can be represented by the term bx, where, as before, x represents volume. The resulting cost equation is the one we saw above: TC =...
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