COB 242 1st Edition Lecture 12 Outline of Current Lecture I. Cost-Volume-Profit RelationshipsII. Cost-Volume-Profit Analysis a. Estimates how profits are affectedIII. The Basics of Cost-Volume-Profit (CVP) Analysisa. Contribution Marginb. Equations and Formulasc. CVP Graphd. Contribution Margin Ratio e. ApplicationsCurrent LectureI. Cost-Volume-Profit RelationshipsII. Cost-Volume-Profit Analysis a. Estimates how profits are affected by:i. Selling pricesii. Sales volumeiii. Unit variable costiv. Total fixed costsv. Mix of products soldb. To calculate, assume:i. Selling price is constant while volume changesii. Costs are linear and can be accurately divided into variable and fixed elementsiii. The mix of products sold remains constant (in multiproduct companies)iv. Whatever we make we sell (units produced = units sold)III. The Basics of Cost-Volume-Profit (CVP) Analysisa. Contribution Margin- the amount available to cover fixed expenses and then to provide profits for the periodi. Contribution Margin = sales revenue – variable expensesb. Break-even point- the level of sales at which profit is zeroc. To find the expected increase in profit for a possible increase in sales:i. Expected increase in profits = increased number of units to be sold X contribution margin per unitd. CVP Relationships in Equation Formi. Profit = (sales – variable expenses) – fixed expenses (old equation)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. Sales = price per unit X quantity sold = P x Q2. Variable expenses = variable expense per unit X quantity sold = Vx Qii. Unit Contribution Margin (CM) = selling price per unit – variable expense per unit = P – V iii. Profit = unit CM X quantity sold – fixed expenses (new equation)e. CVP Relationships in Graphic Formi. Cost-volume-profit graph- shows relationships amount revenue, cost, profit, and volumeii. To prepare a CVP graph:a. Unit volume = x-axis; dollars = y-axis1. Draw a horizontal line for total fixed expense2. Choose some volume of unit sales and plot the point representing total expense t the sales volume you have selecteda. Then draw a line from the point to the intersection of the y-axis and the first line2. Choose some sales volume and plot the point representing total sales dollars at the activity level you have selecteda. Then draw a line through this point back to the origin (0,0)iii. Anticipated profit or loss is measured by the vertical distance between total revenue line (sales) and total expenses linef. Contribution Margin Ratio (CM Ratio)i. Shows how CM will be affected by a change in total salesii. CM Ratio = contribution margin / sales = %1. Can be calculated per unitiii. Change in CM = CM ratio X change in sales iv. Change in Profit = CM ratio X change in sales – change in fixed expensesg. Some Applications of CVP Conceptsi. Variable expense ratio = variable expense / sales1. Can be calculated per unitii. CM ratio = 1 – variable expense ratioiii. Incremental analysis- considers only the costs and revenues that will change if the new program is