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Chapter 3

ACC 410 Chapter Notes - Chapter 3: Contribution Margin, Fixed Cost, Variable Cost


Department
Accounting
Course Code
ACC 410
Professor
Maurizio Di Maio
Chapter
3

Page:
of 10
Chapter 3 Cost-Volume-Profit
Analysis
Cost-volume-profit (CVP) analysis: is a technique that examines changes in
profits in response to changes in sales volumes, costs, and prices
CVP analysis begins with the basic profit equation:
PROFIT = TOTAL REVENUE TOTAL COSTS
or if separating costs into variable and fixed categories, we express profit as:
PROFIT or EARNING =
TOTAL REVENUE TOTAL VARIABLE COSTS
TOTAL FIXED COSTS
Contribution Margin
Contribution Margin: is the total revenue minus the total variable costs
Contribution Margin per unit (CMu): is the selling price per unit minus the
variable cost per unit
Contribution margin per unit tells us how much revenue from each unit sold
can be applied toward fixed costs or contributed to cover fixed costs
Once enough units have been sold to cover all fixed costs, the contribution margin
per unit from all remaining sales becomes profit
TP =
S = 
V =
(S V) = 
Q = 
F =
www.notesolution.com
TP = (S x Q) (V x Q) F
or TP = [(S V) x Q] F
Cost-Volume-Profit Analysis in Units
    !
Example: Suppose that Magik Bicycles wants to produce a new mountain bike
called Magikbike III and has forecasted the following information:
Price per bike = $800
Variable cost per bike = $300
Fixed costs related to bike production = $5,500,000
Target Profit = $200,000
Estimated sales = 12,000 bikes
Input values into formula to determine the quantity of bikes needed to achieve profit of
$200,000
       " "## ### $## ###%## &## " '## ###"## (( )## *
Cost-Volume-Profit Analysis in Revenues
Contribution margin ratio (CMR): the percentage by which the selling price (or
revenue) per unit exceeds the variable cost per unit, or contribution margin as a
percentage of revenue
For single product Contribution Margin Ratio (CMR) =
www.notesolution.com
CVP in terms of total revenue instead of units, substitute the contribution
margin ratio for the contribution margin per unit
   
Recall previous example
First: calculate contribution margin ratio = (S V)/S ($800 $300)/$800 = 0.625 (62.5%)
then, Input values into formula to determine the sales (revenue) needed to achieve profit of
$200,000
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