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Chapter Six
Cost-Volume-ProfitRelationships
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Learning Objective 1
Explain how changes inExplain how changes inactivity affect contributionactivity affect contributionmargin and net operatingmargin and net operating
income.income.
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asics of Cost-Volume-Profit !nal"sis
Contribution #argin $C#% is the amountremaining from sales revenue after variable
e&penses have been 'e'ucte'(
Contribution #argin $C#% is the amountremaining from sales revenue after variable
e&penses have been 'e'ucte'(
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asics of Cost-Volume-Profit !nal"sis
C# is use' first to cover fi&e'e&penses( !n" remaining C#
contributes to net operating income(
C# is use' first to cover fi&e'e&penses( !n" remaining C#
contributes to net operating income(
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+he Contribution !pproach
Sales, variable expenses, and contribution margin canalso be expressed on a per unit basis. If Racing sellsan additional bicycle, $!! additional C" will be
generated to cover fixed expenses and profit.
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+he Contribution !pproach
Each month, Racing must generate at least$#!,!!! in total C" to brea even.
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+he Contribution !pproach
If Racing sells %!! units%!! unitsin a month, it will beoperating at the break-even point.
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+he Contribution !pproach
If Racing sells one more bie &%!' bies%!' bies(, netoperating income will increase by $200.
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+he Contribution !pproach
)e do not need to prepare an income statementto estimate profits at a particular sales volume.Simply multiply the number of units sold above
brea*even by the contribution margin per unit.
If Racing sellsIf Racing sells
%+! bies, its%+! bies, its
net income willnet income willbe $,!!!.be $,!!!.
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Learning Objective 2
-repare and interpret a-repare and interpret acost*volume*profit &C-(cost*volume*profit &C-(
graph.graph.
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CVP Relationships in 0raphic orm
/he relationship among revenue, cost, profit and volumecan be expressed graphically by preparing a C-graph. Racing developed contribution margin incomestatements at +!!, %!!, and 0!! units sold. )e will
use this information to prepare the C- graph.
ncome
3// units
ncome
)// units
ncome
*// units
ales 1*/4///5 2//4///5 2*/4///5
Less variable e&penses ./4/// 12/4/// 1*/4///Contribution margin 6/4///5 /4///5 1//4///5
Less fi&e' e&penses /4/// /4/// /4///
7et operating income $2/4///%5 -5 2/4///5
ncome
3// units
ncome
)// units
ncome
*// units
ales 1*/4///5 2//4///5 2*/4///5
Less variable e&penses ./4/// 12/4/// 1*/4///
Contribution margin 6/4///5 /4///5 1//4///5
Less fi&e' e&penses /4/// /4/// /4///
7et operating income $2/4///%5 -5 2/4///5
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CVP 0raph
1nits
2o
llars
In a C- graph,In a C- graph, unit volumeunit volumeisisusually represented on theusually represented on the
hori8ontal $9% a&ishori8ontal $9% a&isandand 'ollars'ollarsonon
thethe vertical $:% a&isvertical $:% a&is..
In a C- graph,In a C- graph, unit volumeunit volumeisis
usually represented on theusually represented on thehori8ontal $9% a&ishori8ontal $9% a&isandand 'ollars'ollarsonon
thethe vertical $:% a&isvertical $:% a&is..
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CVP 0raph
1nits
2o
llars
i&e' ;&penses
6 1)
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CVP 0raph
2o
llars
1nits
i&e' ;&penses
+otal ;&penses
6 1*
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CVP 0raph
i&e' ;&penses2
oll
ars +otal ;&penses
+otal ales
1nits
6 16
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CVP 0raph
2o
llars
1nits
rea
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Learning Objective 3
1se the contribution1se the contributionmargin ratio &C" ratio( tomargin ratio &C" ratio( to
compute changes incompute changes incontribution margin andcontribution margin and
net operating incomenet operating income
resulting from changes inresulting from changes insales volume.sales volume.
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Contribution #argin Ratio
/he contribution margin ratio is5
6or Racing 7icycle Company the ratio is5
+otal C#+otal sales
C# Ratio =
Each $'.!! increase in sales results in atotal contribution margin increase of %!8.
= )/>5/4///
52//4///
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Contribution #argin Ratio
9r, in terms of units, the contribution margin ratiois5
6or Racing 7icycle Company the ratio is5
52//
5*//
= )/>
?nit C#?nit selling price
C# Ratio =
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)// i
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@uic< Chec
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Coffee =latch is an espresso stand in a downtownoffice building. /he average selling price of a cup ofcoffee is $'.%> and the average variable expenseper cup is $!.+. /he average fixed expense per
month is $',+!!. ,'!! cups are sold each monthon average. )hat is the C" Ratio for Coffee=latch?
a. '.+'>
b. !.@0#
c. !.%
d. %.'+>
@uic< Checof sales.
&$0!,!!! B $0!,!!!(
rea
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+he #argin of afet"
/he margin of safety can be expressed interms of the number of units sold. /he
margin of safety at Racing is $0!,!!!, and
each bie sells for $0!!.
"argin ofSafety in units
< < '!! bies$0!,!!!
$0!!
6-6/
@uic< Chec andthe average variable expense per cup is
$!.+. /he average fixed expense per monthis $',+!!. ,'!! cups are sold each monthon average. )hat is the operating leverage?
a. .'
b. !.%0
c. !.+%
d. .>
Coffee =latch is an espresso stand in adowntown office building. /he averageselling price of a cup of coffee is $'.%> andthe average variable expense per cup is
$!.+. /he average fixed expense per monthis $',+!!. ,'!! cups are sold each monthon average. )hat is the operating leverage?
a. .'
b. !.%0
c. !.+%
d. .>
6-,/
@uic< Chec
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Coffee =latch is an espresso stand in adowntown office building. /he averageselling price of a cup of coffee is $'.%> andthe average variable expense per cup is
$!.+. /he average fixed expense per monthis $',+!!. ,'!! cups are sold each monthon average. )hat is the operating leverage?
a. .'
b. !.%0
c. !.+%
d. .>
Coffee =latch is an espresso stand in adowntown office building. /he averageselling price of a cup of coffee is $'.%> andthe average variable expense per cup is
$!.+. /he average fixed expense per monthis $',+!!. ,'!! cups are sold each monthon average. )hat is the operating leverage?
a. .'
b. !.%0
c. !.+%
d. .>
@uic< Chec