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Chapter 3
Chapter 3
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Ryerson University
Accounting
ACC 410
Keith Whelan
Winter
Description
Chatper 3 – CostvolumeProfit Analysis
Costvolumeprofit (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

Costvolumeprofit 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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