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Lecture Cost management: Measuring, monitoring, and motivating performance (3rd edition) – Chapter 3

Chapter 3 - Cost-volume-profit (CVP) analysis. In this chapter we will discuss: Explain the concept of cost-volume-profit (CVP) analysis in decision making, apply CVP calculations for a single product, apply CVP calculations for multiple products,. | Chapter 3: Cost-Volume-Profit (CVP) Analysis LO1 Explain the concept of cost-volume-profit (CVP) analysis in decision making LO2 Apply CVP calculations for a single product LO3 Apply CVP calculations for multiple products LO4 Describe the assumptions and limitations that managers consider when using CVP analysis LO5 Assess operational risk using margin of safety and operating leverage LO6 Analyze the difference between contribution margin and gross margin LO1 Explain the concept of cost-volume-profit (CVP) analysis in decision making CVP Analysis Cost-volume-profit (CVP) analysis is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices. CVP Analysis Use CVP analysis to provide information about the following: Which products or services to emphasize. The volume of sales needed to achieve a targeted level of profit. The amount of revenue required to avoid losses. Whether to increase fixed costs. How much to budget for discretionary expenditures. Whether fixed costs expose the organization to an unacceptable level of risk. Profit Equation and Contribution Margin The contribution margin is the total revenue minus the total variable costs. The contribution margin per unit (CMu) is the selling price per unit minus the variable cost per unit. Basic profit equation Profit = Total revenue - Total costs Expanding to Profit = Total revenue - Total variable costs - Total fixed costs. Profit Equation and Contribution Margin Profit equation in terms of the contribution margin per unit Profit or earning = Total revenue – Total variable costs – Total fixed costs Profit Equation and Contribution Margin Expected quantity of goods or services that must be sold to achieve a target level of profit The contribution margin ratio written in terms of total sales revenue (TS) and total variable costs (TVC). LO2 Apply CVP calculations for a single product Breakeven Point The breakeven point is the level of operating activity at which . | Chapter 3: Cost-Volume-Profit (CVP) Analysis LO1 Explain the concept of cost-volume-profit (CVP) analysis in decision making LO2 Apply CVP calculations for a single product LO3 Apply CVP calculations for multiple products LO4 Describe the assumptions and limitations that managers consider when using CVP analysis LO5 Assess operational risk using margin of safety and operating leverage LO6 Analyze the difference between contribution margin and gross margin LO1 Explain the concept of cost-volume-profit (CVP) analysis in decision making CVP Analysis Cost-volume-profit (CVP) analysis is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices. CVP Analysis Use CVP analysis to provide information about the following: Which products or services to emphasize. The volume of sales needed to achieve a targeted level of profit. The amount of revenue required to avoid losses. Whether to increase fixed costs. How much to budget for discretionary .