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ACCT 2230 Chapter 7: Chapter 7 Managerial Accounting Notes

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azurecrow744
17 Dec 2011
School
University of Guelph
Department
Accounting
Course
ACCT 2230
Professor
Elliot Currie

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Document Summary

Cvp focuses on how profits are affected by prices of products, volume/level of activity, per unit variable costs, fixed costs, and mix of products sold. Contribution income statement emphasizes the behaviour costs and therefore is helpful to managers who are judging the impact on profits of changes in selling cost, price or volume. Reports sales, variable expenses, & contribution margin on both per unit and total basis. Contribution margin: the amount remaining from sales revenue after variable expenses have been deducted. Will be used to cover fixed expenses first then whatever remains goes towards profits. Operating loss occurs if contribution margin cant cover fixed expenses. A cpv graph highlights cpv relationships over wide ranges of activity. Unit volume is represented on horizontal x-axis & dollars on vertical y-axis. Contribution margin (cm) ratio: the contribution margin as a percentage of total sales. This ratio shows how the contribution margin will be affected by a change in total sales.

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Related Questions

Contribution margin is the amount remaining after?

a. fixed expenses have been deducted from sales revenue.

b. variable expenses have been deducted from sales revenue.

c. cost of goods sold has been deducted from sales revenues.

d. fixed expenses have been deducted from variable expenses.

Cost-volume-profit (CVP)

posted Nov 28, 2016, 4:07 AM

Cost-volume-profit (CVP) analysis is a key step in manydecisions. CVP analysis involves specifying a model of therelations among the prices of products, the volume or level ofactivity, unit variable costs, total fixed costs, and the salesmix. This model is used to predict the impact on profits of changesin those parameters. Explain how changes in activity affectcontribution margin and net operating income.

A company produces memory enhancement kits for fax machines. Saleshave been very erratic, with some months showing a profit and somemonths showing a loss. The company's contribution format incomestatement for the most recent month is given below:


Sales (12,600 units at $40 per unit) $ 504,000
Variable expenses 252,000
Contribution margin 252,000
Fixed expenses 282,000
Net operating loss $ (30,000)


Required:
1.

Compute the company's CM ratio and its break-even point in bothunits and dollars.


CM ratio %
Break-even point in units
Break-even point in dollars $


2.

The sales manager feels that an $6,700 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in a $81,000 increase in monthly sales. Ifthe sales manager is right, what will the revised net operatingincome or loss? (Use the incremental approach in preparing youranswer.)


(Click to select)Net operating lossNet operating incomeis $


3.

Refer to the original data. The president is convinced that a 10%reduction in the selling price, combined with an increase of$37,000 in the monthly advertising budget, will double unit sales.What will the new contribution format income statement look like ifthese changes are adopted?


Contribution Income Statement
(Click to select)Net operating income (loss)SalesFixedexpensesContribution marginVariable expenses $
(Click to select)Contribution marginSalesVariableexpensesNet operating income (loss)Fixed expenses
(Click to select)Net operating income (loss)VariableexpensesContribution marginSalesFixed expenses
(Click to select)Variable expensesContributionmarginNet operating income (loss)Fixed expensesSales
(Click to select)SalesVariable expensesNet operatingincome (loss)Fixed expensesContribution margin $


4.

Refer to the original data. The company