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    CVP Analysis - The Basics: Contribution Margin - Illustrations

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    Sakiful Islam
    CVP analysis helps managers make important decisions by estimating how profits are affected by selling prices, sales volume, unit variable costs, total fixed costs, and product mix. It assumes selling prices and costs are constant and can be divided into variable and fixed elements. For a bicycle company, contribution margin is sales revenue minus variable expenses, which is used to cover fixed expenses and determine profit. Contribution margin per unit is $200, so selling one more bicycle increases net operating income by $200.

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    CVP Analysis - The Basics: Contribution Margin - Illustrations

    Uploaded by

    Sakiful Islam
    41 views2 pages
    CVP analysis helps managers make important decisions by estimating how profits are affected by selling prices, sales volume, unit variable costs, total fixed costs, and product mix. It assumes selling prices and costs are constant and can be divided into variable and fixed elements. For a bicycle company, contribution margin is sales revenue minus variable expenses, which is used to cover fixed expenses and determine profit. Contribution margin per unit is $200, so selling one more bicycle increases net operating income by $200.

    Original Description:

    CVP analysis part 1

    Original Title

    Notes_Lecture 3.1.1

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    CVP analysis helps managers make important decisions by estimating how profits are affected by selling prices, sales volume, unit variable costs, total fixed costs, and product mix. It assumes selling prices and costs are constant and can be divided into variable and fixed elements. For a bicycle company, contribution margin is sales revenue minus variable expenses, which is used to cover fixed expenses and determine profit. Contribution margin per unit is $200, so selling one more bicycle increases net operating income by $200.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    41 views2 pages

    CVP Analysis - The Basics: Contribution Margin - Illustrations

    Uploaded by

    Sakiful Islam
    CVP analysis helps managers make important decisions by estimating how profits are affected by selling prices, sales volume, unit variable costs, total fixed costs, and product mix. It assumes selling prices and costs are constant and can be divided into variable and fixed elements. For a bicycle company, contribution margin is sales revenue minus variable expenses, which is used to cover fixed expenses and determine profit. Contribution margin per unit is $200, so selling one more bicycle increases net operating income by $200.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    CVP Analysis – the Basics

    Cost-volume-profit (CVP) analysis helps managers make many important decisions such as
    what products and services to offer, what prices to charge, what marketing strategy to use,
    and what cost structure to maintain. Its primary purpose is to estimate how profits are
    affected by the following five factors:
    1. Selling prices.
    2. Sales volume.
    3. Unit variable costs.
    4. Total fixed costs.
    5. Mix of products sold.
    To simplify CVP calculations, managers typically adopt the following assumptions with
    respect to these factors:
    1. Selling price is constant. The price of a product or service will not change as volume
    changes.
    2. Costs are linear and can be accurately divided into variable and fixed elements. The
    variable element is constant per unit. The fixed element is constant in total over the entire
    relevant range.
    3. In multiproduct companies, the mix of products sold remains constant.

    Contribution Margin – Illustrations

    Contribution margin is the amount remaining from sales revenue after variable expenses have
    been deducted. Thus, it is the amount available to cover fixed expenses and then to provide
    profits for the period. Notice the sequence here—contribution margin is used first to cover
    the fixed expenses, and then whatever remains goes toward profits. If the contribution margin
    is not sufficient to cover the fixed expenses, then a loss occurs for the period.
    Racing Bicycle Company
    Contribution Income Statement
    For the Month of June
    Sales (500 bicycles) $ 250,000
    Less: Variable expenses 150,000
    Contribution margin 100,000
    Less: Fixed expenses 80,000
    Net operating income $ 20,000

    1
    Contribution Margin (CM) is the amount remaining from sales revenue after variable
    expenses have been deducted. Or in Other words, CM is used first to cover fixed expenses.
    Any remaining CM contributes to net operating income.

    Racing Bicycle Company


    Contribution Income Statement
    For the Month of June
    Total Per Unit
    Sales (500 bicycles) $ 250,000 $ 500
    Less: Variable expenses 150,000 300
    Contribution margin 100,000 $ 200
    Less: Fixed expenses 80,000
    Net operating income $ 20,000

    Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If
    Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed
    expenses and profit.

    Racing Bicycle Company


    Contribution Income Statement
    For the Month of June
    Total Per Unit
    Sales (401 bicycles) $ 200,500 $ 500
    Less: Variable expenses 120,300 300
    Contribution margin 80,200 $ 200
    Less: Fixed expenses 80,000
    Net operating income $ 200

    If RBC sells one more bike (401 bikes), net operating income will increase by $200.

    Core Reading/Textbook:

    Garrison, Ray, H., Noreen, Eric, W., & Brewer, Peter, C. (2015). Managerial Accounting.
    [15th Edition]. The McGraw-Hill, New York, USA.

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