AB03 Chapter 3.docx

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Financial Accounting
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G.Quan Fun

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MGAB03 Week 3 09/16/13 Chapter Three: Cost-Volume-Profit Analysis Cost-Volume-Profit Analysis  Cost-volume-profit analysis: the technique that examines s in profits in response to s in sales volumes, costs, & prices Profit Equation & Contribution Margin  Profit equation  Separate fixed category  valuable tools when considering the effects of volume on profit  Contribution margins: total revenue minus total variable costs  Contribution margin per unit (CM ): thu selling price per unit minus the variable cost per unit  how much revenue from each unit sold can be applied toward fixed costs or contributed to cover them  Once fixed costs r covered the remaining is profit  Earning before Taxes  ( ) ( ) Where  EBT = Earnings Before taxes  S = Selling price per unit  V = variable cost per unit  (S – V) = Contribution margin per unit  Q = Quantity of product sold (units of goods or services)  F = Total fixed costs  We use the profit equation to plan for different volumes of operations.  CVP analysis can be performed using either  Units (quantity) of product sold  Revenues (in dollars) CVP Analysis In Units  Assuming that fixed costs remain constaint; solve for expected quanitity of gooda/services that must b sold to achieve a target level of profit  ( )  ( -) ( ) CVP Analysis in Revenues  contribution margin ratio (CMR): is the percentage by which the selling price (or revenue) per unit exceeds the variable cost per unit  % of revenue  CMR for a single product  1 | P a g e MGAB03 Week 3 09/16/13  To analyze CVP in terms of total revenue instead of units, we sub the CMR foruCM  ( )⁄  CMR of 0.625 means that 62.5% of the revenue from each unit contributes first to fixed costs and then to profit after fixed costs are covered  CMR in terms of total revenue; will give same value as per unit  ( )⁄  Where  TS = Total sales revenue  TVC = total variable revenue  Ex. For Magikbike III, we could use the forecast information about volume (12,000 bikes) to determine the contribution margin ratio: Contribution Income Statement Per Unit Total % Sales revenue (12,000 bikes) $800 $9,600,000 100.00 Less: variable cost 300 3,600,000 37.50 Contribution margin 500 6,000,000 62.50 Less: fixed costs 5,500,000 Operating income (profit) before taxes $ 500,000 Performing CVP Analysis  Breakeven point: level of operating activity at which revenues cover all fixed and variable costs, resulting in zero profit  Contributions is the same as fixed costs ~ no profit  Cost-Volume-Profit Graph  Cost-volume-profit (CVP) graph: Diagram of the relationship between total revenues and total costs; illustrates expected changes in an organization's profits under different volumes of activity 2 | P a g e MGAB03 Week 3 09/16/13 CVP w/ Income Taxes  ( )  ( )  ( )  Pretax Earnings:  ( ) CVP w/ Variable Amount of Earning  ( ) OPTIMISM BIAS OPTI
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