COMM 305 Final: Chapter6

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An assumption of cvp analysis is that all costs can be classified as either variable or fixed. The contribution margin per unit is the amount that each unit sold contributes towards covering fixed and variable costs. A cvp income statement shows contribution margin and gross profit. A cvp income statement separates costs based on behaviour. Max company"s break-even point is 2,000 units, its contribution margin per unit is , and its selling price per unit is . If the company sell 10 more units, its net income will be ,000. O"brien company has a margin of safety ratio of . 60. This means that if the company"s sales drop by 50% it will be operating at a loss. If a company installs an automated factory which increases their fixed costs and lowers their variable costs, you might say they have decreased their operating leverage.

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