12 terms

CH 3 CVP analysis

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Six assumptions
1) Changes in the level of revenues and costs arise only b/c of changesin the number of product units produced or sold
2)Total costs cand be divided into fixed component
3) Behaviour o total revenues and total costs is linear in relation to output within relevent range
4) Unit selling price, unit variable costs, and toatl fixed costs are known
5) Analsis covers a single poducts or assumes a given revenue mix
6) revenues and costs can be added and compared w/out time value of money
Contribution margin
Revenues - Variable costs
Contribution margin per unit
Difference b/w selling price and variable cost per unit
Contribution margin %
CM / Selling price
Equation Metod
Revenues - Variable costs - Fixed costs = Operating income
(USP x Q) - (UVC x Q) - FC = OI
Contribution Margin Method
Break even point: Q = FC+OI / UCM
Breakeven
Fixed costs / Unit contribution margin = FC/UCM
CM in revenue dollars
FC / CM%
Contribtuion margin income statement
Revenues XXXX
Variable costs (XXX)
----------
Contribution margin XXX
Fixed costs (XXX)
---------
Operating income XXX
Revenue (sales) mix
Let S = Number of units in product A
Let 2S = Number of units in product B

Revenue - VC - FC = OI
[$200(2S) + $200(S)] - [120(2S) + 90(S)] - FC = OI
How many units must be sold to earn an $ amount operating income
Let Q = Number of units sold to earn target operating income
Revenues (Q) - Variable costs(Q) - fixed costs = Targeted operating income

Use of CM:
Q = FC+TOI / CMU
How many units must be sold to earn an $ amount of Net income (use this when we have tax rate)
Let Q = number of units sold to earn target net income
Revenues(Q) - variable costs (Q) - fixed cost =
Target NI / (1 - tax rate)
furthermore,
Target operating income = Target NI / (1 - Tax rate)
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