Understanding Cost-Volume-Profit Analysis in Business

School: York University - Course: ACC 406 - Subject: Accounting

ACC450 Chapter 4 Cost-Volume-Profit Relationships Revenue - Variable Cost= Contribution Margin -Contribution Margin:contribution made to cover fixed costs & Profit Cost-Volume-Profit (CVP)analysis -Used to understand the nature of the profitable performance of their business -Can findnumber of unites that must be sold to break even -Can findimpact of a given reduction in fixed costs on the break-even point -Can findimpact of a an increase in price on Profit Operating Income =total revenue - total operating expense Variable Costs -Direct Materials -Direct Labour -Variable factory overhead -Variable selling & administrative Costs Fixed Costs -Fixed factory overhead -Fixed selling and administrative Contribution Margin Income Statement -Uses income statement based on separation of costs intofixedandvariable components -Contribution Margin =Sales - Variable Costs (1,000,000 - 400,000) =600,000 -Income from operations =Contribution Margin - Fixed Costs (600,000 - 500,00) =100,000 Contribution Margin Ratio =Contribution Margin÷Sales Change in Income from operations =Change in sales dollars x Contribution Margin Ratio Variable Cost as percentage of sales (%):100% - contribution margin ratio)

Unit Contribution Margin Unit Contribution Margin -Used to analyze profit potential of proposed decisions Unit Contribution Margin =Sales Price per unit - Variable cost per unit Change in income from operations =Change in sales units x Unit Contribution margin Break-Even Points in Units Break-even point (BEP):point wheretotal revenue = total cost(Point of zero profit) Operating income =(Price x Number of Units Sold) - (Variable cost per unit x number of units sold) - Total fixed cost UsingOperating Income Equationto findBreak-even point Example Price =$400 Variable Cost per unit =$325 Total Fixed Cost =$45,000 Step 1: (Price x Break-even units) - (Variable Cost per unit x Break-even units) - Total Fixed Costs Step 2:($400 x Break-even units) - ($325 x Break-even units) - $45,000 Step 3:($75 x Break-even units) - $45,000 Step 4:($75 xBreak-even units) - $45,000 $75 Step 5:Break-even units = Step 6:Break-even units =600 Total contribution Margin (Sales - Total variable expense)MUSTbe equal toTotal fixed expense Total contribution Margin = Total Fixed Expense