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# Week 4 Notes ACCT 226 - 001

USC

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This 2 page Class Notes was uploaded by Madeline Lacman on Sunday September 18, 2016. The Class Notes belongs to ACCT 226 - 001 at University of South Carolina taught by Debbie Huguley Brumbaugh (P) in Fall 2016. Since its upload, it has received 6 views. For similar materials see Introduction to Managerial Accounting in Accounting at University of South Carolina.

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Date Created: 09/18/16

Cost-Volume-Profit Relationships Key Assumptions of CVP Analysis 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. In multiproduct companies, the sales mix is constant Review Related Points Contribution margin Contribution format of the income statement VC and FC behaviors Linear equation Basics of Cost-Volume-Profit Analysis The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume The emphasis is on cost behavior Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted o Used first to cover fixed expenses Per Unit – Contribution Approach Sales, variable expenses, and contribution margin can also be expressed on a per unit basis If Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses and profit Each month, RBC must generate at least $80,000 in total contribution margin to break-even Which is the level of sales at which profit is 0 If RBC sells 400 units in a month, it will be operating at the break-even point We do not need to prepare an income statement to estimate profits at a particular sales volume Multiply the number of units sold above break-even by the contribution margin per unit Contribution Margin Ratio (CM Ratio) Calculated by dividing the total contribution margin by total sales Each $1 increase in sales results in a total contribution margin increase of 40 cents If Racing Bicycle increases sales from 400 to 500 bikes ($50,000) CM will increase by $20,000 ($50,000 x 40%) CVP Relationships in Equation Form The contribution format income statement can be expressed in the following equation: Profit = (Sales – Variable Expenses) – Fixed Expenses Profit = (P x Q – V x Q) – Fixed Expenses It is often useful to express the simple profit equation in terms of the unit contribution margin (Unit CM) as follows: Unit CM = Selling price per unit – Variable expenses per unit Unit CM = P – V Profit = Unit CM x Q – Fixed expenses CVP Relationships in Graphic Form Revenue, cost, profit, and volume can be expressed graphically by preparing a CVP graph In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis First: draw a line parallel to the volume axis to represent total fixed expenses Second: choose some sales volume, say 400 units, and plot the point representing total expenses (fixed and variable). Draw a line through the data point back to where the fixed expenses line intersects the dollar axis Third: choose some sales volume, say 400 units, and plot the point representing total sales. Draw a line through the data point back to the point of origin The Variable Expense Ratio The variable expense ratio is the ratio of variable expenses to sales

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