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LEARNING OBJECTIVES:
After studying chapter 6, you should be able to:
Explain how changes in activity affect Contribution Margin and Net Operating Income. Prepare and interpret a cost-volume-profit (CVP) graft and profit graft Use the contribution Margin ratio (CM Ratio)to compute changes in Contribution and Net Operating Income resulting from changes in Sales Volume Show the effects on Contribution Margin of changes in Variable Costs, Fixed Costs, Selling Price and Volume
Determine the level of sales needed to achieve a desired target profit Determine Break-even point Compute the margin of safety an explain its significance Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income Compute the Break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the breakeven point
When COST PER UNIT is identified, the company will consider how many units will then be produced (VOLUME) to get a certain margin of PROFIT for certain VOLUME of Products sold
PER UNIT COST($10)
X NUMBER OF UNITS(100)
COST
VOLUME
ANALYSIS
PROFIT
Selling Price, sales volume, unit variable cost, total fixed cost, mix of product sold
PROFIT
NET OPERATING INCOME
Cost-Volume-Profit (CVP)Analysis
-Is the powerful tool that helps managers understand the relationship among cost, volume, and profit. -CVP Analysis focuses on how profit are affected by the following FIVE FACTORS: 1. 2. 3. 4. 5. Selling Prices Sales volume Unit variable cost Total fixed cost Mix of products cost
Selling Price: is the amount actually attach to the product or the value of a product Sales volume: is the number of unit sold in a transaction Unit variable cost: a non-fixed cost or expense incurred to manufacture a certain product Total fixed cost: is the overall sum of fixed cost or expenses Mix products sold: pertain to two or more varieties of product sold
THE IMPORTANCE OF CVP ANALYSIS CVP analysis helps managers understand how profits are affected by these 5 key factors.
Selling price
SALES VOLUME
MIX OF PRODUCT
MARKET
UNIT VARIAB LE COST
SOLD
It is a vital tool in many business decisions. These decision include what product and services to offer, what price to charge, what marketing strategy to use, and what cost structure to implement. It will help the managers decide on certain aspect of operation whether certain product is significant in some areas for profit margin It will help what product is saleable and what is not It will also help the company reach its ROI
Contribution Margin
Fixed Expenses Net Operating Income
96,362,000
17,800,00 78,562,000
78.28