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## Cost-Volume-Profit Analysis

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**1. **Chapter 22 Cost-Volume-Profit Analysis

**2. **Objective 1 Identify how changes in volume affect costs.

**3. **Types of Costs

**4. **Total Variable Cost

**5. ** Variable costs per unit do not changeas activity increases. Variable Cost Per Unit

**6. **Variable Costs Example Consider Grand Canyon Railway.
Assume that breakfast costs Grand Canyon Railway $3 per person.
If the railroad carries 2,000 passengers, it will spend $6,000 for breakfast services.

**7. **Variable Costs Example

**8. **Total Fixed Cost

**9. **Mixed Costs Contain fixed portion that is incurred even when facility is unused & variable portion that increases with usage.
Example: monthly electric utility charge
Fixed service fee
Variable charge per kilowatt hour used

**10. **Mixed Costs

**11. **Relevant Range... …is a band of volume in which a specific relationship exists between cost and volume.
Outside the relevant range, the cost either increases or decreases.
A fixed cost is fixed only within a given relevant range and a given time span.

**12. **Relevant Range

**13. **Objective 2 Use CVP analysis to compute breakeven point.

**14. **Assumptions of CVP Analysis Expenses can be classified as either variable or fixed.
CVP relationships are linear over a wide range of production and sales.
Sales prices, unit variable cost, and total fixed expenses will not vary within the relevant range.

**15. **Assumptions of CVP Analysis Volume is the only cost driver.
The relevant range of volume is specified.
Inventory levels will be unchanged.
The sales mix remains unchanged during the period.

**16. **Contribution Margin Income Statement Sales
- Variable Costs
Contribution Margin
- Fixed Costs
Operating Income

**17. **Contribution Margin Example Luis and Tom manufacture a device that allows users to take a closer look at icebergs from a ship.
The usual price for the device is $100.
Variable costs are $70 per unit.
They receive a proposal from a company in Newfoundland to sell 20,000 units at a price of $85.

**18. **Contribution Margin Example There is sufficient capacity to produce the order.
How do we analyze this situation?
$85 – $70 = $15 contribution margin.
$15 × 20,000 units = $300,000 (total increase in contribution margin)

**19. **Contribution Margin Income Statement Sales (20,000 x $85) $1,700,000
Variable costs
(20,000 x $70) (1,400,000)
Contribution margin $300,000

**20. **The unique sales level at which a company earns neither a profit nor incurs a loss.
Sales – Variable Costs – Fixed Costs = 0
Computing Break-Even Point

**21. **Breakeven Point Example

**22. **Objective 3 Use CVP analysis for profit planning and graph the cost-volume-profit relations

**23. **Preparing a CVP Chart

**24. **Preparing a CVP Chart

**25. **Various Sales Levels Example What operating income is expected when sales are _____ units?

**26. **Target Operating Income Example Suppose that our business would be content with operating income of _________________.
How many units must be sold?

**27. **Objective 4 Use CVP method to perform sensitivity analysis.

**28. **Change in Sales Price Example Suppose that the sales price per device is _____ rather than ____
What is the revised breakeven sales in units?

**29. **Change in Variable Costs Example Suppose that variable expenses per device are ____ instead of ____
Other factors remain unchanged.

**30. **Change in Fixed Costs Example Suppose that fixed costs increased by $30,000.
What are the new fixed costs?
What is the new breakeven point?

**31. **Margin of Safety Example Excess of expected sales over breakeven sales.

**32. **E22-7

**33. **Effect of sales mix on CVP analysis.

**34. **Computing MultiproductBreak-Even Point Unit contribution margin is replaced with contribution margin for a composite unit.
A composite unit is composed of specific numbers of each product in proportion to the product sales mix.
Sales mix is the ratio of the volumes of the various products.

**35. **The resulting break-even formulafor composite unit sales is: Computing MultiproductBreak-Even Point

**36. **Computing MultiproductBreak-Even Point A company sells windows and doors. They sell 4 windows for every door.

**37. **Computing MultiproductBreak-Even Point

**38. **Computing MultiproductBreak-Even Point

**39. **Computing MultiproductBreak-Even Point

**40. **Computing MultiproductBreak-Even Point

**41. **Multiproduct Break-EvenIncome Statement