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Chapter 07

MGT223 Chapter07:Cost-Volume-Profit Notes

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Department
Management
Course
MGT223H5
Professor
Minlei Ye
Semester
Fall

Description
MGT223 Chapter07: Cost-Volume-Profit Analysis (CVP) Cost-Volume-Profit (CVP) Analysis: managers use to help them understand the interrelationship among cost, volume and profit by focusing on the following elements: 1. prices of products 2. volume or level of activity 3. per unit variable costs 4. total fixed costs 5. mix of products sold Total Contribution Margin = Sales – Variable Costs Contribution Margin per Unit = Price – Variable Cost per Unit Contribution margin Contribution margin per unit Contribution Margin Ratio = = Sales Price Break-Even-Point (BEP): when profit is zero (Sales – VC – FC = 0) Break-Even-Point in Units: number of units to sell to break even = X 1. equation method: X*Sales per unit – X*VC per unit – FC = 0 2. contribution margin method: Fixed expense BEP in Units = Contribution margin per unit Break-Even-Point in Dollars: amount of sales to break even = X 1. equation method: X – X*(1-CM ratio) – FC = 0 2. contribution margin method: Fixed expense BEP in Dollars = Contribution margin ratio * The relationship among revenue, cost, profit and volume can be expressed graphically by preparing a CVP Graph. - in a CVP graph, unit is on the horizontal axis and dollars on the vertical axis 450,000 400,000 Fixed Expenses 350,000 Total Expenses 300,000 Total Sales 250,000 200,000 Break-Even-Point 150,000 100,000 50,000 - - 100 200 300 400 500 600 700 800 Target Profit 1
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