ACC 406 Chapter Notes - Chapter 4: Contribution Margin, Earnings Before Interest And Taxes, Fixed Cost

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25 Jul 2016
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Chapter 4: Cost-Volume Profit Analysis: A Managerial
Planning Tool
Break Even Point In Units and in Sales Dollars
Cost Volume Profit Analysis (CVP): Estimates how changes in costs (both variable
and fixed), sales volume, and price affect a company’s profit
-CVP is a powerful tool for planning and decision making
Break Even Point (BEP): The point where total revenue equals total cost
Using Operating Income in Cost Volume Profit Analysis
-Variable costs are all costs that increase as more units are sold including: direct
materials, direct labour, variable factory overhead, and variable selling and
administrative costs
-Fixed Costs include: fixed factory overhead, fixed selling and administrative expenses
Contribution Margin Income Statement: Income statement format that is based on
the separation of costs into fixed and variable opponents
Contribution Margin
Contribution Margin: The excess of sales over variable costs
Contribution Margin = Sales - Variable Costs
Contribution Margin Ratio
Contribution Margin Ratio: Indicates the percentage of each sales dollar available to
cover fixed costs and to provide income from operations
Contribution Margin
Contribution Margin Ratio = __________________
Sales
Change in income
from operations = Change in Sales Dollars X Contribution Margin Ratio
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Unit Contribution Margin
Unit Contribution Margin: Useful for analyzing the profit potential for proposed
decisions
Unit Contribution Margin = Sales Price Per Unit - Variable Cost Per Unit
Change in income
from operations = Change in Sales Units X Unit Contribution Margin
Break Even Point in Units
Operating Income= Sales - Total Variable Expenses - Total Fixed Expenses
Operating Income= (Price x Number of units sold) - (Variable cost per unit x
number of units sold) - Total Fixed Cost
Total Fixed Cost
Break Even Units = __________________________
Price - Variable Cost Per Unit
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