Unit 3 Journal

School: Columbia Southern University - Course: MHR 6451 - Subject: Accounting

Unit 3 Journal Calculating the cost-benefit ratio (CVP) requires plugging in numerous numbers into a spreadsheet, which are then shown on an economic graph. When determining a company's desired sales volume, the fixed cost component of the formula may be adjusted to include a goal profit per unit as shown above. The breakeven point may also be calculated using the CVP formula. The number of units sold or the income produced must be sufficient to cover the expenses of manufacturing the product before it reaches the breakeven threshold. Additionally, the product contribution margin may be managed using CVP analysis as well. It is the gap between total sales and variable expenses that constitutes the contribution margin. The contribution margin must be greater than the total fixed expenses for a firm to be profitable. Calculating the margin per unit is an option as well. After subtracting the unit variable cost from the unit sales price, the unit contribution margin is just the remaining. A company's contribution margin to total sales is equal to that ratio. An economic rationale for a product's production is determined using a cost-volume-profit analysis. In order to achieve the intended profit, a target profit margin is added to the breakeven sales volume, or the number of units that must be sold in order to pay the product's expenses and reach the target sales volume. Decision makers might then assess whether or not it is worthwhile to manufacture the product by comparing sales predictions with goal sales volume.