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Chapter 3

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Ryerson University

Accounting

ACC 410

Peggy Woo

Summer

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Chapter 3: Cost - Volume - Profit (CVP) Analysis
Q1: What is cost-volume-profit analysis, and how is it used for decision making?
CVP Analysis
• CVP analysis looks at the relationship between selling prices, sales volumes, costs, and profits
• Use CVP analysis to provide information about the following:
– 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
Q2: How are CVP calculations performed for a single product?
CVP Calculations for a Single Product
where:
– F = Total fixed costs
– EBT = Earnings before taxes
– S = Selling price per unit
– V = Variable cost per unit of activity
– (S - V) = Contribution margin per unit (CM)
where:
– F = Total fixed costs
– EBT = Earnings before taxes
– CMR = Contribution margin ratio
– CMR = S - V = Total revenue - Total variable costs
S Total revenue
Q3: What is a breakeven point?
Breakeven Point
• The breakeven point (BEP) is where total revenue equal total costs
• Calculate BEP from preceding CVP formulas by setting EBIT to zero
• The CVP graph shows the relationship between total revenues and total costs Breakeven Point Example
• Bill’s Briefcases makes high quality cases for laptops that sell for $200. The variable costs per briefcase are $80,
and the total fixed costs are $360,000. Find the BEP in units and in sales $ for this company.
CVP Graph Example
• Draw a CVP graph for Bill’s Briefcases. What is the pretax profit if Bill sells 4,100 briefcases? If he sells 2,200
briefcases? Recall that P = $200, V = $80, and F = $360,000.
CVP Calculations
• How many briefcases does Bill need to sell to reach a target pretax profit of $240,000? What level of sales
revenue is this? Recall that P = $200, V = $80, and F = $360,000.
CVP with Income Taxes
• How many briefcases does Bill need to sell to reach a target after-tax profit of $319,200 if the tax rate is 30%?
What level of sales revenue is this? Recall that P = $200, V = $80, and F = $360,000.
Q4: How are CVP calculations performed for multiple products?
CVP Analysis for Multiple Products
• When a company sells more than one product the CVP calculations must be adjusted for the sales mix. 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 $ • The weighted average contribution margin is the weighted sum of the products’ contribution margins:
WACM n CM
where: i=1 i i
– λ = product i’s % of total sales in units
i
– CM i product i’s contribution margin
– n = number of products
• The weighted average contribution margin ratio is the weighted sum of the products’ contribution margin ratios:

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