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COMM 2P65 (8)
Chapter 4


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Communication Studies
Daniel Glenday

ACC 406 CHAPTER 4 NOTES CostVolume Profit CVPanalysis estimates how changes in costs both variable and fixed sales volume and price affect a companys profit CVP is a powerful tool for planning and decision making Breakeven Pointis the point where total revenue equals total cost ie the point of zero profit New startup companies typically experience losses negative operating income initially and view their first breakeven period as a significant milestone For CVP analysis it is much more useful to organize costs into fixed and variable components The focus is on the firm as a whole Therefore the costs refer to all costs of the companyproduction selling and administrationSo variable costs are all costs that increase as more units are sold including direct materials direct labour variable overhead and variable selling and administrative costsSimilarly fixed costs include fixe overhead and fixe selling and administrative expenses Contribution Margin Income Statementthe income statement format that I based on the separation of costs into fixed and variable components is called the contribution margin income statement Contribution Marginis defined as the excess of sales over variable costsContribution MarginSalesVariable costsContribution Margin Ratiocan also be expressed as a percentage Indicates the percentage of each sales dollar available to cover fixed costs and to provide income from operations The contribution margin ratio is computed as followsContribution margin ratioContribution marginSales The contribution margin ratio is most useful when the increase or decrease in sales volume is measured in sales dollars In this case the change in sales dollars multiplied by the contribution margin ratio equals the change in income from operations as shown belowChange in income from operationsChange in sales dollars X contribution margin ratio If a company adds 100000 in sales orders its income from operations will increase by10000060600000That is income from operations will increase from 100000 to 160000 when sales increase from 1000000 to 1100000 Variable costs as a percentage of sales are equal to 100 percent minus the contribution margin ratio Thus the variable costs for the company are 40 percent 10060 of sales or in absolute numbers 440000 1100000660000 The total contribution margin 440000 can also be computed
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