ACC 222 Ch5

Profit CMR

(CMR*Sales)*Fixed Expenses

The CVP graph has three important areas:

1.the break-even point, where the total revenue and total expense lines cross. 2.the loss area. When the sales are below the break-even point, the company suffers a loss. 3.the profit area. We know that for any sales above the break-even point, the company earns a profit.

Contribution margin Ratio

CM Ratio= Total Contribution Margin/Total Sales OR CMR=Unit Contribution Margin/Unit Selling Price

Break Even Unit Analysis:Formula Method

Fixed Expenses /Unit CM

Break Even Dollar Analysis:Formula Method

Fixed Expenses/Unit CMR

Break Even Dollar Analysis:Equation Method

Profit= CMR*Sales-Fixed Expenses

Profit UCM equation

Profit= Unit UCM*Q-Fixed Expenses

contribution format income statement in equation form

Profit=(P*Q-V*Q)-Fixed expenses P=Selling Price per unit Q=Units Sold V=Variable expenses per unit

Break Even Unit Analysis: Equation Method

Profit=Unit CM*Q-Fixed Expenses

Contribution Margin

Sales Revenue-Variable Expenses= Contribution margin is the amount available to cover fixed expenses and to provide profits for the period. If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period.

TP Formula Method

Target Profit+Fixed Expenses/Unit CM

Breakeven Point

The point at which sales exactly cover expenses. Profit is zero. Once the break-even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold.

target profit analysis in units

There are two methods for the calculation of target profit in units: the equation method and the formula method. Using the equation method, we compute the quantity (Q) using unit contribution margin, fixed expenses, and desired profit.

TP Equation Method

Unit CM * Q-Fixed Expenses

Unit Contribution Margin equation

Unit CM= Selling Price Per Unit (P) - Variable expenses per unit (V)

variable expense ratio

Variable Expenses _____________ Sales OR 1- CM Ratio a concept related to the contribution margin ratio. The variable expense ratio is the ratio of variable expenses to sales. The two concepts are related because contribution margin ratio can also be computed as one minus the variable expense ratio, and vice versa.

Incremental Analysis

ignores sunk costs and costs that are the same between the two alternatives to look only at the remaining costs. For this reason, it is also called the "relevant cost approach," "marginal analysis" or "differential analysis." If a company is considering replacing its old copy machine, using incremental analysis, the company would not look at the cost of the existing copy machine because it is a sunk cost (the cost of buying it cannot be reversed). They would look at things like the cost of toner cartridges for each machine, the cost of the electricity run each machine, and most importantly, the time saved by having employees use a more efficient model and perhaps the cost savings of being able to prepare documents in-house instead of outsourcing them.

cost-volume-profit graph

illustrates the relationships among revenue, cost, and profit over different levels of activity. Activity volume is represented on the X axis and sales, costs, or profit dollars on the Y axis.

Target Profit

the level of profit that a company's management desires to earn at the end of a business period. We can use cost-volume-profit equations and formulas to determine the sales volume needed to achieve a target profit. The required level of sales can be calculated either in units or in dollars.