A202 Chapter 5 Notes
A202 Chapter 5 Notes BUS-A202
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This 3 page Class Notes was uploaded by Lauren Detweiler on Monday February 9, 2015. The Class Notes belongs to BUS-A202 at Indiana University taught by Diane Biagioni in Spring2015. Since its upload, it has received 79 views. For similar materials see Managerial Accounting in Business at Indiana University.
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Date Created: 02/09/15
A202 Week 5 Prof Biagioni Textbook Notes Chapter 5 excluding Multiproa uct C VP pp 1 77183 C ost VolumePro t Analysis I The CostVolumePro t CVP Relation a Profit before taxes 2 Price unit variable costgtlt Sales volume in units Fixed costs b Price unit variable cost unit contribution margin c CVP relation is simply a convenient way to express the contribution margin statement 11 How Firms Use the CVP Relation a Frequently used by rms to estimate pro t at different sales volumes b Uses of the CVP Relation i Plan pro t ii Evaluate decision options 1 Change shortterm prices 2 Change mix of xed and variable costs 3 Change product mix III The CVP Relation and Pro t Flaming a Breakeven volume the sales volume at which pro t equals zero i Revenues equal total costs ii To have any chance of making a pro t a rm must have a positive unit contribution margin in other words price must exceed the unit variable cost 1 This alone does not guarantee pro t the rm must sell enough units so that the contribution margin at least covers xed costs Fixed Costs 111 Breakeven Volume 2 Unit Contribution Margin b Breakeven revenues the sales dollars needed to break even 1 Breakeven revenues Breakeven volume x Price ii OR Fixed Costs 111 Breakeven revenues Contribution Margin Ratio iv Reminder Contribution Margin Contribution margin ratio Revenues Revenues Variable Costs Revenues IV Target Pro t a Can come up with the same target pro t using either i Unit Contribution Margin Profit before taxes 2 Unit Contribution Margin x Sales volume in units Fixed costs ii Contribution Margin Ratio Profit before taxes 2 Contribution Margin Ratio x Revenues Fixed costs b CVP Analysis and Taxes i Profit after taxes 2 Profit before taxes x 1 tax rate V Using the CVP Relation to Make ShortTerm Decisions a Managers can analyze different options in terms of the CVP Relation and its effect on various elements that make up the rm s pro t b Using the CVP Relation to evaluate price changes i CVP analysis allows rms to evaluate the tradeoff between price and quantity and their effect on pro t ii Note keep in mind the shortterm focus of CVP analysis VI Using the CVP Relation to Evaluate Operating Risk a Two common measures of operating risk i Margin of safety 1 The amount by which current sales exceeds breakeven sales 2 Expressed in percentage terms M f S f t Sales in units Breakeven volume Revenues Breakeven Revenues ar in 0 a e I I g y Sales in units Revenues 3 Generally the higher the margin of safety the lower the risk of a loss should actual sales fall short of expectations a No rule on what is an appropriate margin of safety b Varies by rmindustry situation etc 4 Margin of safety and pro t sensitivity a To calculate the percent change in pro t that results from any given percent change in sales 1 0 C ange in pT39Ofl efore axes 0 C ange in a BS 0 ume Margin of safety 1 0 h 39 R X 0 C ange m evenueS Margin of safety ii Operating Leverage l A measure of risk arising from having more xed costs Fixed C osts Fixed C osts Fixed CostsVariable Cost Total Costs 3 In general we prefer the technology w1th a smaller operating leverage at lower sales volumes and technology with a larger operating leverage at higher sales volumes VII CVP Analysis A Critical Evaluation a Assumptions underlying CVP Analysis i Revenues increase proportionally with sales volume ii Variable costs increase proportionally with sales volume iii Selling prices unit variable costs and xed costs are known with certainty iv Revenues and costs occur in a single period v Product mix is constant and known 2 Operating Leverage Vi Does not always provide the best solutions to shortterm decisions Vii There is availability of capacity
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