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Chapter 3

Chapter 3

4 Pages
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Department
Accounting
Course Code
ACC 410
Professor
Vanessa Magness

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Chapter 3: Cost- Volume- Profit Analysis
Cost- Volume- Profit (CVP) Analysis: technique that examines changes in profits in
response to changes in sales volume, costs, and prices.
CVP describes volume, revenues, costs and profits and plan future level of
operating activities
Values at breakeven or target profit
units sold
revenues
variable, fixed, and total costs
Sensitivity of results to changes in:
levels of activity
cost function
selling price
sales mix
indifference point between alternatives
feasibility of planned operations
Contribution Margin (CM): total revenue minus total cost
Profit Equation and Contribution Margin (CM)
Profit = Total revenue Total cost
GM = Sales - COGS
CM = total revenue Total variable cost
CMU (per unit) = selling price per unit variable cost per unit
CMR = S V / S
EBT ( Earnings before taxes) = (S-V) x Q F
EAT (Earnings After taxes) = EBT x (1 tax rate)
EBT = EAT / (1 tax rate)
Operating Income = Sales VC FC
Break-even point = level of operating activity at which revenues cover all fixed and
variable costs, resulting in zero profit (CM=FC)
BE = FC / CM
Cost Volume Profit (CVP) Graph: shows the relationship between total revenues and
total costs; illustrates how an organizations profits are expected to change under
different volumes of activity
As sales increase, the loss decreases by the CM for each product sold
Sales beyond the breakeven point, we see an increase in profits
Can be used to make business decisions (ex: increase or decrease expenditures)
Assist with plans and decisions such as
budgets
product emphasis
selling price
production or activity levels
employee work schedule
raw material purchases
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Description
Chapter 3: Cost- Volume- Profit Analysis Cost- Volume- Profit (CVP) Analysis: technique that examines changes in profits in response to changes in sales volume, costs, and prices. CVP describes volume, revenues, costs and profits and plan future level of operating activities Values at breakeven or target profit units sold revenues variable, fixed, and total costs Sensitivity of results to changes in: levels of activity cost function selling price sales mix indifference point between alternatives feasibility of planned operations Contribution Margin (CM): total revenue minus total cost Profit Equation and Contribution Margin (CM) Profit = Total revenue Total cost GM = Sales - COGS CM = total revenue Total variable cost CMU (per unit) = selling price per unit variable cost per unit CMR = S V S EBT ( Earnings before taxes) = (S-V) x Q F EAT (Earnings After taxes) = EBT x (1 tax rate) EBT = EAT (1 tax rate) Operating Income = Sales VC FC Break-even point = level of operating activity at which revenues cover all fixed and variable costs, resulting in zero profit (CM=FC) BE = FC CM Cost Volume Profit (CVP) Graph: shows the relationship between total revenues and total costs; illustrates how an organizations profits are expected to change under different volumes of activity As sales increase, the loss decreases by the CM for each product sold Sales beyond the breakeven point, we see an increase in profits Can be used to make business decisions (ex: increase or decrease expenditures) Assist with plans and decisions such as budgets product emphasis selling price production or activity levels employee work schedule raw material purchases www.notesolution.com
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