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## PowerPoint Slideshow about ' COST-VOLUME-PROFIT RELATIONSHIP' - jolie-vargas

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### COST-VOLUME-PROFIT RELATIONSHIP

CHAPTER 5

CVP Formula

- Sx = VCx + FC + P
- S= Selling Price
- X= Sales Volume
- VC = Variable Cost per unit
- FC = Fixed Cost
- P= Profit
- Very powerful equation
- If all else fails just work the equation

Things you can find out using CVP formula

- Breakeven points
- Units to sell to get a certain profit
- How many more to sell if Fixed Cost increased
- Selling Price

Apply CVP Formula

- Selling Price $36
- Variable Cost $24 per unit
- Fixed Costs $12,000
- Units 2,000
- Profit= ?
- Put in CVP formula

CONTRIBUTION MARGIN

- The amount that contributes to fixed costs and profits i.e Contribution
- Calculated In per unit, $ and in %
- $100 Sales
- 60 VC
- $ 40 CM 40% Ratio ($40/$100= .40)
- 35 FC
- $ 5 NI

CONTRIBUTION MARGIN FORMAT Income Statement

- SALES
- -VARIABLE COST
- =CONTRIBUTION MARGIN
- - FIXED EXPENSES
- NET OPERATING INCOME
- Exercise 5-1 page 213

Application of CVP Data

- Exercise 5-5 page 214
- 1- Increase advertising budget
- 2- Increase quality of product

BREAK EVEN (BE) IN UNITS & $

- The units or $ that will cover the fixed costs with no profit.
- Sx – VCx= FC BE in equation method
- FC/CM% = BE$ CM Method
- You can determine: BE in units, BE in $
- Exercise 5-7 pg 214

PROFIT PLANNING

- Answers these questions:
- How many do I need to sell to make $100,000 profit
- For example: If I reduce my fixed costs by $2,000 and increase my sales in units by 100 how will my profit change?

Target Profit Analysis

- Formula for units to make a $ profit
- FC + Profit
- Unit CM
- X sales price = Sales to attain target profit
- Exercise 5-6 pg 214
- 1- equation method
- 2- CM approach

Margin of Safety (MS)

- Amount you can drop before losses are incurred
- How much can our sales drop before we start losing money
- Every company has a different % because each is structured differently
- How much excess you have over break even.
- How much you have after you cover your fixed costs.

Margin of Safety formula

- Budgeted Sales – BE$ = MS$
- MS$/Budgeted Sales=MS%
- Example:
- Sales $100,000
- BE$ 87,500
- MS$ $ 12,500 / 100,000 = 12.5%
- Exercise 5-8 page 214

Operating Leverage (OL) pg 202

- How sensitive income is to a % change in Sales $
- How a % change in Sales volume will affect profits.
- It is a Multiplier
- If OL is high a small % change in Sales will reuslt in a higher change in NI

Operating Leverage Formula

- Contribution Margin $
- Net Income in $
- It OL is 2 and sales increased by 5% then net income will increase by 10%
- Exercise 5-9 pg 215

Operating leverage proof

- Sales 100,000 110,000
- VC 60,00066,000
- CM 40,000 44,000
- FC 35,000 35,000
- NI 5,000 9,000 $4,000
- OL 40,000/5000= 8 times x 10%
- 80% x $5000 = $4000

CM Ratio

- Another way to determine effect on net income
- Change in Net Income with the change in Total Sales
- If we sell 10,000 more units, how would our net income increase?
- 10,000 X25%CM= 2500 change in units X $24 per unit = $60,000 increase in NI
- How much would our net income increase if our sales increase by $240,000
- $240,000 X 25% = $60,000

Sales Mix Multi Product CM

- Proportions in which a company’s products are sold
- Mix that will yield the greatest profit
- Steps to determine
- 1- Total all sales
- 2- VC % for each product and total sales
- 3- = CM% for all sales
- 4- Determine total BE$ FC/CM%
- 5- Each product % of total sales X BE$
- 6- Use VC% for each product for VC
- 7- =CM for each product = total fixed costs
- Page 206 Exhibit 5-4
- Exercise 5-10, pg 215

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