Ch. 16

Fixed Costs

All fixed overhead and fixed selling and administrative expenses.

Variable Costs

Include all costs that increase as more units are sold. Including DM, DL, Variable Overhead, and variable selling and administrative costs.

Profit

(Sales price per unit * VC per unit)*Q)-FC

Contribution Margin Per Unit

=Price-Varibale cost per unit

Break-even point

The point in the volume of activity at which the organization's revenues and expenses are equal. (Where Net Income=0) Break-even point in units=Fixed expenses/Unit contribution margin (tells us how many units we need to produce in order to break even)

Cost Volume Profit (CVP) Analysis

Used as a tool to understand how many units we need to produce and sell in order to break even. -Assume the firm's costs can be broken down into variable and fixed costs.

Target Income

Find out how many units must be produced and sold to break even or to earn a target income. Use the equation derived from the contribution margin approach. =(Total fixed cost+Target Income)/(Price-Variable cost per unit) For when target income is 0..=Total fixed cost/(Price-variable cost per unit) OR use the equation approach: Revenue=Variable costs+Fixed Costs+Target Income to find Q.

Quantity

Profit+FC/CMpu **Use before tax numbers. To get before tax=after tax/(1-tax rate)

Contribution Margin Approach

Recognizes that at break-even, the total contribution margin equals the fixed expenses. The contribution margin is sales revenue minus total variable costs.

Contribution Margin Statement

Sales -Variable Expenses =Contribution Margin -Fixed Expense =Operating Income (profit)

Contribution Margin (CM) Ratio

Used to calculate the break-even point in sales dollars CM Ratio=Contribution margin/Sales So the break-even point in sales dollars=Fixed expense/CM Ratio