Cost Volume Profit Essay

Some things we go to bedThe objective of all(prenominal) business is to make cash (profit) for the owners advance = Revenues ExpensesRevenues = Sales = Quantity sell x monetary value per unit of measurementExpenses = the be related tothe specific taxation (COGS)or the specific accounting periodMatching Principle single-valued function of Management isPlanning, control and performance measurement, and decision-makingDecision-making relates to future events and involves riskFull be (full-absorption following) is a good historical tool but may notBe the best indicator of future activity beca custom it is based on past events. equal BehaviorVariable cost total dollars miscellanea with volume, Cost per unit is constantFixed Costs total dollars ar constant, equal per unit changes with volumeMixed Costs include whatever variable cost and some fixed be organic Cost = Fixed Costs + record book(variable cost per unit)Fixed constituent Variable ComponentPurely Fixed $25,000$ 0Purely Variable 0 5.00 per unitMixed Costs 10,000 2.00 per unitTotal Costs $35,000$7.00 per unitGraphing Total CostsX axis (horizontal/across) = volumeY axis (vertical/up & down) = dollarsEstimating the Composition of Mixed CostsAccount compendScattergraph Visual critical review of plotted panesHigh-Low EstimationTheory The change in total costs between the high volume point andThe low volume point, essential be purely variable costsLinear Regression (computer help scattergraph) piece Margin Income StatementIgnores the function of the expensesFocus is on cost behavior (fixed and variable)Used extensively in forecasting future capability outcomes (planning & decision making)BecauseProfit = Revenue Expenses(Costs)WhereRevenue = Volume x price per unitAndTotal Costs = Fixed Cost + (Volume x Variable cost per unit)ThereforeVolume x price per unitLess Volume x variable cost per unitLess Fixed costsProfitRevenueLess Variable CostsCONTRIBUTION perimeterLess Fixed CostsPretax Prof itKNOW THIS FORMULA frontwards AND BACKWARDSMargin of Safety = the difference between the evaluate take of volume and the break-even point (normally using sales dollars but could also use units sold).When comparing two or more alternatives it may be implemental to look at the Margin of Safety as a part of sales.Contribution Margin Ratio = CM per unit / Selling wrong per unitOrContribution Margin / SalesOperating Leverage = Fixed Costs / Contribution MarginOrContribution Margin/Pretax ProfitCost-Volume-Profit (CVP) abbreviationBreak-Even Point = the point at which profit = zero (i.e. we break even)= The point at which Contribution Margin = Fixed CostsOnce we know the break-even point, we bear begin to plan for target profitTarget Pre tax income Profit versus Target After revenue ProfitPretax Profit$ light speedLess appraise Expense 40After Tax or Net Profit$ 60Effective Tax Rate = Tax Expense / Pretax Profit(40% above)Tax Expense = Pretax Profit x Effective Tax RateNet Inco me = Pretax Profit x (1- effective tax rate)Pretax Profit = Net Profit / (1- effective tax rate)Multiple Product CVP AnalysisWeighted-Average Contribution Margin (also referred to as blended average)PRODUCT MIX IS censoriousProduct 1Product 2TotalUnits Sold10020Selling Price$10.00$50.00Variable Costs 5.00$30.00Sales$1,000$1,000$2,000Contribution Margin 500$ 400 900CM Ratio 50% 40% 45%SO LONG AS THE PRODUCT MIX corpse AT 51 THE PROJECTEDCM RATIO leave alone STAY AT 45%. Therefore if sales atomic number 18 expected to be $20,000, AND WE SELL 5 of Product 1 for every 1 unit of Product 2, Contribution Margin should be $9,000 ($20,000 x 45%)However if sales of Product 1 are lone(prenominal) $1,000 and the stay $19,000 are sales of Product 2 the Contribution margin is only $8,100 and the CM Ratio drops to 40.5%.$ 1,000 x 50% = $ 500plus$19,000 x 40% = $7,600$20,000 $8,100 = 40.5% of salesor (1/20 x .50) + (19/20 x .40).025 + .38 = 40.5%When computing the Weighted-Average Contribution Margin USE SALES DOLLARS as the deliberateness factor (NOT UNITS).Constraint = a limitation of resourcesTo maximize profits apt(p) a express resource, produce the product that generates the highest contribution margin per limited resource. This may not be the product with the highest contribution margin ratio. allegory A company manufactured two types of beer, premium and regular. Both types of beer are brewed in the same kettles. A regular batch brews for 15 age and yields 12,000 feeding bottles. A premium batch brews for 30 days and yields 12,000 bottles. Regular beer sells for $1.00 per bottle and has variable costs of $0.40 per bottle. The premium sell for $1.50 per bottle and has variable costs of $0.50 per bottle. Assuming unlimited demand of both products, which product should the company brew?PremiumRegularPer BatchSales$15,000$12,000CM$12,000$ 7,200CM % 66.67% 60.00%CM per Limited alternative (Days)CM$12,000$ 7,200Divided by days 30 15CM per day of limitedResource use $400 $480Regular beer has a higher CM per limited resource.Therefore, given unlimited demand of both types, produce only regular.Proof In 30 days we can make one batch of premium, which willing yield $12,000 in CM. In the same 30 days we can make 2 batches of regular, which will yield $14,400 in CM.We are in business to make money for the owners, not percentages. You cant deposit percentages in the bank