Cost Volume Profit PDF

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Cost Volume Profit...

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ACCT 116 Week One Lecture Two Chapter Five Cost-Volume-Profit Relationships

I.

What is CVP ○

Cost, Volume, PRofit

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Basic Assumptions 1. Selling price is constant 2. Costs are linear and can be accurately divided into variable (constant per unit) and fixed (constant in total) elements. 3. Helps managers understand how changes in sales and costs affect profit.

II.

Contribution Margin ○

Contribution Margin = Sales - Variable Cost

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If the contribution margin is not sufficient to cover fixed expense a loss occurs

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CM is used first to cover fixed expenses.Any remaining CM contributes to net operating income.

III.

IV.

V.

VI.

○ Profit after sales when taking out the cost of production Break Even Point ○

Total Sales - Total Cost (FC + VC) = 0

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CM = FC

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Fixed Expenses ÷ CM Per Unit = Amount of Units Needed

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Net Operating Income = CM Per Unit x Amount over Break Even Point

Profit ○

Profit is the same as net income

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Profit = (Sales - Variable Cost) - Fixed expenses

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Profit = (Price x Quantity - Variable Cost x Quantity) - Fixed Expense

Equations ○

Unit CM = Selling price per unit - Variable expenses per unit

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Unit CM = P - V

CVP Graphic Form ○

Unit volume x axis

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Dollars y axis

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Fixed expense line is a constant line

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Total Cost = FC + VC

VII.

VIII.

IX.

Contribution Margin Ratio ○

CM Ratio = CM Per Unit ÷ Sales Price Per Unit

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Profit = (CM Ratio x Sales) - Fixed Expenses

Variable Expense Ratio ○

VC Ratio = VC Per Unit ÷ Sales Prices Per Unit

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VC Ratio + CM Ratio = 1

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VC Ratio = 1 - CM Ratio

Target Profit ○

Profit = Unit CM x Q - Fixed Expenses 1. Compute the number of units that must be sold to attain a target profit using either the equation method or formula method 2. We usually know CM and Fixed expenses

X.

The Margin of Safety ○

In dollars is the excess of budget

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Actual sales ÷ Break even volume of sales

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Amount by which sales can drop before losses are incurred

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Higher the margin of safety, excess revenue, lower risk of not breaking even and incurring a loss

○ XI.

Margin of Safety Percentage ○

XII.

Margin of Safety = Total Sales - Break Even Sales

MS % = Margin Of Safety ÷ Total Sales

Margin of Safety in Units ○

Margin of Safety in Units = Margin of Safety ÷ Price per Unit...