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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.

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cvp formula
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
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
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
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
CONTRIBUTION MARGIN FORMAT Income Statement
  • SALES
  • -VARIABLE COST
  • =CONTRIBUTION MARGIN
  • - FIXED EXPENSES
  • NET OPERATING INCOME
  • Exercise 5-1 page 213
application of cvp data
Application of CVP Data
  • Exercise 5-5 page 214
  • 1- Increase advertising budget
  • 2- Increase quality of product
break even be in units
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
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
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
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
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
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
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
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
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% = $60,000
sales mix multi product cm
Sales Mix Multi Product CM
  • Proportions in which a company’s products are sold
  • Mix that will yield the greatest profit
  • Steps to determine
  • 1- Total all sales
  • 2- VC % for each product and total sales
  • 3- = CM% for all sales
  • 4- Determine total BE$ 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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