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Lecture 3

ACC 406 Lecture 3: Lecture 3

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Ryerson University
ACC 406
Anthony Chan

01/31/2017 Chapter 4- Cost-Volume-Profit Analysis (CVP analysis) Homework: P4-36, C4-45 (Reg. 1-3 only)  Decisions about o Price o Revenues o Costs o Volume o Profit o Sales mix  Income= revenue-costs = (price)(volume)-(total fixed costs)-(variable cost per unit)(volume)  Breakeven situation: o 0=(price)(volume)-TFC-(variable cost per unit)(volume) o (Price)(Volume)= TFC+(VC per unit)(Volume) The contribution approach:  revenues in dollars= FC + Profit contribution ratio  contribution ratio or contribution margin ratio o = contribution margin Revenues o Contribution margin = revenue- variable cost Contribution format income statement Traditional format income statement  Based on variable costing approach  Based on absorption costing approach Revenue Revenue Less: variable cost VCofGS or VOX Less: cost of goods sold can be separated Contribution margin into variable CoGS or Fixed CoGS Less: fixed cost FCoGS or FOX Gross margin Income Less: operating expenses Variable or fixed Income  Revenue in units= FC+ Profit / Contribution margin per unit  BEP in terms or dollars= FC/Contribution ratio  BEP in terms of units= FC/ Contribution margin per unit 1 Proving that the basic equation is the income equation Margin of Safety  Margin of safety = current sales performance- break even sales  Used to measure how far sales can go down before you have a loss  Break even sales is the minimum you have to achieve o If you achieve break even you don’t make profit or lose money  Current performance may be better than min requirement  the difference between the two will be the margin Ex. Revenue $100,00
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