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Decision Making: Cost-Volume-Profit, How changes in cost and volume affect…
Decision Making: Cost-Volume-Profit
CVP Income Statement
Variable and fixed costs
Variable cost ratio
V Costs as a % of sales
Contribution margin
Revenues - Variable costs
Contribution margin per unit
Unit selling price - unit variable costs
Contribution margin ratio
Contribution margin per unit / unit selling price
Differs from GAAP Income Statement since it states CM
Gapp emphasizes gross profit
Calculating Break-even Point
Contribution margin
Fixed costs / unit contribution margin
(CVP) Graph
Math equation
Variable costs + fixed cost + operating income= Sales
Sales required to earn target operating income
Before tax
Required Sales in Dollar
Fixed Costs + Operating Incomes before taxes / Unit Contribution Margin
Required Sales In units
Fixed Costs + Operating
Incomes before taxes / Contribution Margin Ratio
Operating income before taxes = operating income after taxes / (1 - tax rate)
After tax
Operating Income after taxes = operating income before taxes * (1 - tax rate)
Margin of safety
The cushion that a level of sales provide above break-even point
In dollars
Actual(Expected) Sales - Break-even sales
Ratio
Margin of safety in dollars / actual(Expected) sales
Concepts of CVP in changing environment
How would a discount affect Break even
It would increase the break-even
How new equipment affect break-even
It would decrease break-even
Increase price of raw mats affect on BEP
Increases break-even
Sales-mix
Weighted- averaged unit contribution margin
Breakeven of multiple products
Unit contribution margin (1) + Sale mix % * Unit contribution margin (2) + Sale mix %
Break - even point in units
Fixed costs / Weight-Average Unit Contribution Margin
Weighted - average contribution margin ratio
contribution margin ratio (1) + Sale mix % * contribution margin ratio (2) + Sale mix %
Break-Even Points in dollars
Fixed Costs / Weighted - Average Contribution Margin Ratio
Relative proportion in which one
product out many is sold.
Cost structure
Proportion of tixed vs variable cost a company incurs
Operating leverage
How changes in cost and volume affect profits