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ACC 410 (34)
Chapter 3

# Chapter 3

3 Pages
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Department
Accounting
Course Code
ACC 410
Professor
Keith Whelan

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Chatper 3 Cost-volume-Profit Analysis
Cost-volume-profit (CVP) analysis examines relationship between selling prices, sales
volumes, costs and profits
Future levels of operating activities
Which products/services to emphasize
The amount of revenue required to avoid losses
Whether to increase fixed costs
How much to budget for discretionary expenditures
Profit Equation and Contribution Margin
-Contribution margin: CM = R V
Tells us how much revenue from each unit sold can be applied toward fixed costs
or contributed to cover fixed costs
-Contribution margin per unit: CMu = Su Vu
-CVP analysis can be performed using either:
Units (quantity) of product sold
Revenues (in dollars)
CVP Analysis in Units
-Earnings (profit) equation:
EBT = S * Q V * Q F = (S V) * Q FSolving for Q ,
CVP Analysis in Revenues
-Contribution margin ratio (CMR) percentage by which selling price per unit exceed
variable cost per unit, or contribution margin as a percentage of revenue
OR
Breakeven Point level of operating activity at which revenues cover all fixed and variable
costs
-In other words, contribution = fixed costs
-
Cost-volume-profit Graph shows the relationship between total revenues and total costs
CVP with Income Taxes
-Earnings after taxes (EAT) = EBT Taxes = EBT (Tax rate*EBT) = EBT * (1
Tax Rate)
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Description
Chatper 3 – Cost-volume-Profit Analysis Cost-volume-profit (CVP) analysis – examines relationship between selling prices, sales volumes, costs and profits - Used to provide information about: • Future levels of operating activities • Which products/services to emphasize • The amount of revenue required to avoid losses • Whether to increase fixed costs • How much to budget for discretionary expenditures Profit Equation and Contribution Margin - Contribution margin: CM = R – V • Tells us how much revenue from each unit sold can be applied toward fixed costs or contributed to cover fixed costs - Contribution margin per unit: CMu = Su – Vu - CVP analysis can be performed using either: • Units (quantity) of product sold • Revenues (in dollars) CVP Analysis in Units - Earnings (profit) equation: • EBT = S * Q – V * Q – F = (S – V) * Q – F Solving for Q , CVP Analysis in Revenues - Contribution margin ratio (CMR) – percentage by which selling price per unit exceed variable cost per unit, or contribution margin as a percentage of revenue • • OR Breakeven Point – level of operating activity at which revenues cover all fixed and variable costs - In other words, contribution = fixed costs - Cost-volume-profit Graph – shows the relationship between total revenues and total costs CVP with Income Taxes - Earnings after taxes (EAT) = EBT – Taxes = EBT – (Tax rate*EBT) = EBT * (1 – Tax Rate) www.notesolution.com CVP for multiple products - Sales mix – proportion of different products or services that an organization sells - The sales mix should be stated as a proportion: • Of total units sold when performing CVP calculations in units • Of total revenues when performing CVP calculations in sales \$ CVP Calculations for a Sales Mix CVP Sensitivity Analysis – helps managers explore the potential impact of variations in data they consider to particularly important or uncertain Uncertainties and Assumptions - CVP analysis assumes that costs and revenues are linear within a relevant range of activity • Linear total revenues mean that selling prices per unit are constant and sales mix does not change * offering volume discounts to consumers violates this assumption • Linear total costs mean total fixed costs are constant and variable costs per unit
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