Chapter 6b Cost-Volume-Profit Analysis

Cost-Volume-Profit:

Expresses the relationships among costs, volume, and profit or loss.

Cost-Volume: We use specific, volumes and costs to determine:

Breakeven levels, Target Operating Income levels, Predict Operating Income

What are the the two ways to increase Profit 1:

Increase Sales Revenue: Increase Sales Volume, Increase Sales Price.

What are the two ways to increase Profit 2:

Decrease Costs: Decrease Unit Variable Costs, Decrease Total Fixed Costs

Contribution Margin:

Excess of Sales Revenue above Variable Costs. Amount available to cover fixed costs and generate operating income.

How do we calculate Contribution Margin?

Sales Price Per Unit - Variable Cost Per Unit = Contribution Margin Per Unit. Total Sales - Total Variables Costs = Total Contribution Margin

How does Contribution Margin differ from Gross Profit?

CM differs from GP because it takes into account all variable costs, regardless of cost function (Product or Period costs).

What does Contribution Margin tell us?

The amount by which our Sales Price exceeds Variable Costs per unit. The amount available from each unit sale that can be used to cover Fixed Costs and generate operating income.

Contribution Margin % Calculated?

Contribution Margin % = Contribution Margin / Sales Revenue. Contribution Margin % = Contribution Margin per Unit / Sales Price per Unit

What do we learn from our Contribution Margin % ?

It tells us what percentage of each dollar made is available to cover fixed costs and generate operating income. The other “piece” of the sales dollar covers VC. This can also be expressed as percentage.