ADM 2341 Lecture Notes - Lecture 10: Earnings Before Interest And Taxes, Contribution Margin, Income Statement
9 Nov 2015
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Document Summary
Cost volume profit (cvp) analysis is a powerful tool that managers use to help them understand the interrelationship among cost, volume and profit in an organization by focusing on interactions among the following five elements: prices of products, volume or level of activity, per unit variable costs, total fixed costs, mix of products sold. The analysis focuses on cost behaviour in relation to changes in activity level: the objective is to find the level of unit sales at which we are indifferent between the two options, as a result, we base our decision on expected sales levels, at what level of unit sales would we be indifferent between the two alternatives, determine the unit contribution margin (cm) times the number of units (q) plus total fixed costs of each alternative, setup an equation with each alternative on opposite sides of the equal sign, solve for q, the indifference point.
