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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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