Textbook Notes (362,879)
Accounting (526)
ACC 410 (34)
Peggy Woo (3)
Chapter 3

5 Pages
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School
Ryerson University
Department
Accounting
Course
ACC 410
Professor
Peggy Woo
Semester
Summer

Description
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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