Management and Organizational Studies 3370A/B Chapter Notes - Chapter 4: Contribution Margin, Fixed Cost, Break Even

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 3370A/B
• Professor: Barry Hawn

Document Summary

Cvp focuses on how profits are affected by the following five elements: prices of products, volume or level of activity, per unit variable cost, total fixed cost, mix of products sold. The basics of cost-volume-profit analysis: the contribution income statement emphasizes the behavior of costs and therefore is extremely helpful;; to a manager in judging the impact on profits of changes in selling price, cost, or volume. Once the break even point is reached, operating income will increase by the unit cm for each additional unit sold. Contribution margin ratio: contribution margin/ sales or 1- variable expense ratio, shows how the cm is affected by change in total sales, every increase in sales, will result in percentage increase of cm. Variable expense ratio: the ratio of variable expenses to sales: variable expenses/ sales. Change in fixed cost and sales volume: eg. Increasing advertising budget (fixed expense), will increase total sales.