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Chapter 5 Cost Volume Profit Relationships
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Chapter 3 Cost Volume Profit Relationships
Sales Mix
Break Even Analysis
Target Profit Analysis
Profit = Unit CM x Q - Fixed Expense
The level of sales at which the company's profit margin is equal to zero.
The Margin of Safety
Margin of Safety in dollars = Total Budgeted (or actual) Sales - Break Even Sales
Margin of Safety percentage = Margin of Safety in dollars divided by Total Budgeted (or actual) Sales in dollars
Contribution Margin (CM) Ratio
Cost Volume Profit Analysis (CVP)
Preparing the CVP Graph
Cost Structure and Profit Stability
Contribution Margin divided by Sales
Determine Advantages and Disadvantages by examining the Net Operating Income vs. CM ratio and Margin of Safety percentage
Learn to create a chart; then you may decide to generate hypothetical data for the assignment due at the end of the module...
Applying CVP Concepts
Operating Leverage
Estimates how profits are affected by:
- Selling Prices
- Sales Volume
- Unit Variable Costs
- Total Fixed Costs
- Mix of Products Sold
Variable Expense Ratio =
Variable Expenses divided by Sales
Contribution Margin divided by Net Operating Income
Contribution Margin
(PxQ-VxQ) - Fixed Expenses =
The amount remaining from sales revenue after variable expenses have been deducted.
If a company has a single product, the equation can be represented this way:
Sales = Selling Price Per Unit (P) x Quantity Sold (Q)
Variable Expenses = Variable Expenses per Unit (V) x Quantity Sold (Q)
Profit = (PxQ -VxQ) - Fixed Expenses
CVP Equation:
Profit =
(Sales - Variable Expenses) - Fixed Expenses