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CHAPTER 6 305.docx

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COMM 305

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CHAPTER6CostVolumeProfit Analysis and Income StatementCostvolumeprofit CVP analysis is the study of the effects that changes in costs and volume have on a companys profits1 The behaviour of both costs and revenues is linear throughout the relevant range of the activity index2 All costs can be classified with reasonable accuracy as either variable or fixed3 Changes in activity are the only factors that affect costs4 Inventory levels remain constantall units that are produced are sold5 When more than one type of product is sold the sales mix will remain constant That is the percentage of total sales that each product represents will stay the same The sales mix complicates CVP analysis because different products will have different cost relationships In this chapter we assume first a single product is being sold Study objective 7 addresses sales mix issuesThe costvolumeproflt CVP income statement classifies costs as variable or fixed and calculates a contribution margin Contribution margin CM is the amount of revenue that remains after variable costs have been deducted It is often stated both as a total amount and on a perunit basisContribution MarginCONTRIBUTION MARGIN PER UNIT
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