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11 th Edition Chapter 6

11 th Edition Chapter 6. Cost-Volume-Profit Relationships. Chapter Six. Basics of Cost-Volume-Profit Analysis. Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. Basics of Cost-Volume-Profit Analysis.

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11 th Edition Chapter 6

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  1. 11th EditionChapter 6

  2. Cost-Volume-Profit Relationships Chapter Six

  3. Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted.

  4. Basics of Cost-Volume-Profit Analysis CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income.

  5. The Contribution Approach Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses and profit.

  6. The Contribution Approach Each month Racing must generate at least $80,000 in total CM to break even.

  7. The Contribution Approach If Racing sells 400 unitsin a month, it will be operating at the break-even point.

  8. The Contribution Approach If Racing sells one more bike (401 bikes), net operating income will increase by $200.

  9. The Contribution Approach We do not need to prepare an income statement to estimate profits at a particular sales volume. Simply multiply the number of units sold above break-even by the contribution margin per unit. If Racing sells 430 bikes, its net income will be $6,000.

  10. CVP Relationships in Graphic Form The relationship among revenue, cost, profit and volume can be expressed graphically by preparing a CVP graph. Racing developed contribution margin income statements at 300, 400, and 500 units sold. We will use this information to prepare the CVP graph.

  11. CVP Graph Dollars In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis. Units

  12. Fixed Expenses CVP Graph Dollars Units

  13. Total Expenses Fixed Expenses CVP Graph Dollars Units

  14. Total Sales Total Expenses Fixed Expenses CVP Graph Dollars Units

  15. Break-even point(400 units or $200,000 in sales) CVP Graph Profit Area Dollars Loss Area Units

  16. Total CM Total sales CM Ratio = $80,000 $200,000 = 40% Contribution Margin Ratio The contribution margin ratio is:For Racing Bicycle Company the ratio is: Each $1.00 increase in sales results in a total contribution margin increase of 40¢.

  17. Unit CM Unit selling price CM Ratio = $200 $500 = 40% Contribution Margin Ratio Or, in terms of units, the contribution margin ratiois:For Racing Bicycle Company the ratio is:

  18. A $50,000 increase in sales revenue results in a $20,000 increase in CM. ($50,000 × 40% = $20,000) Contribution Margin Ratio

  19. Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the CM Ratio for Coffee Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139

  20. Unit contribution margin Unit selling price CM Ratio = ($1.49-$0.36) $1.49 = $1.13 $1.49 = = 0.758 Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the CM Ratio for Coffee Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139

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