MGMT 201: Chapter 7 Notes
MGMT 201: Chapter 7 Notes MGMT 201
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This 2 page Class Notes was uploaded by Zach Weinkauf on Sunday February 28, 2016. The Class Notes belongs to MGMT 201 at Purdue University taught by David Scott in Spring 2016. Since its upload, it has received 47 views. For similar materials see Managerial accounting in Business, management at Purdue University.
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Date Created: 02/28/16
Lecture 13: February 23, 2016 Chapter 7: Cost Volume Profit Analysis Cost-Volume-Profit Analysis The analytical technique used by managerial accountants to address these types of questions. o What effect on profit can United Airlines expect if it adds an additional flight on the Chicago to New York route? o How will NBCs profit change if its ratings increase for its evening news program? It provides management within comprehensive overview of the effects on cost revenue. Key Assumptions of CVP Analysis: o The behavior of total revenue is linear. This implies that the price of the product or service will not change as sales volume varies within the relevant range. o The behavior of total expenses is linear over the relevant range. This implies the following more specific assumptions: Expenses can be categorized as fixed, variable, or semi-variable. Total fixed expenses remain constant as activity changes, and the unit variable expenses remains unchanged as activity varies. The efficiency and productivity of the production process and workers remain constant. o In multiproduct organizations, the sales mix remains constant over the relevant range. o In manufacturing firms, the inventory levels at the beginning and end of the period are the same. This implies that the number of units produced during the period equals the number of units sold. Break Even Point – the level of activity where total revenues equal total expenses (variable and fixed). Total Contribution Margin The amount of revenue available to cover fixed costs. Total Sales Revenue – Total Variable Expense = Total Contribution Margin Break Even Point in Units = Fixed Expenses / Contribution Margin per Unit (Sales Price – VC per Unit) Break Even Point in Dollars = Fixed Expenses / Contribution Margin Ratio Contribution Margin Ratio = Contribution Margin per Unit / Sales Price per Unit To find Target Profit add Target Profit to Fixed Expenses in Numerator Safety Margin = Budget Sales Revenue – Break-even Sales Revenue Lecture 14: February 25, 2016 CVP Analysis with Multiple Products For a company with more than one product. o Sales Mix – the relative combo (proportion) that a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. Weighted-Average Unit Cost Margin The sales mix is used in this process. o The average of the several products unit contribution margins, weighted by the relative sales proportion of each product. Contribution Margin Income Statement The contribution format highlights the distinction between variable and fixed expenses. Weighted Average Contribution Margin = SUM(Contribution Margins * Sales Mix)