Principles of Managerial Accounting

1. Principles of Managerial Accounting Chapter 6

2. Cost-Volume-Profit (CVP) Analysis • CVP is used to predict the impact on profits with changes: • Selling price • Variable cost per unit • Sales volume • Total fixed costs.

3. Contribution Margin • Contribution margin: • Sales minus variable costs. (Contribution to fixed costs and profits.) • Contribution margin ratio: • Contribution margin/sales • Break-even point – the point when sales equals Fixed plus Variable costs (zero profit)

4. Break-even point • Break-even – equation method • To determine quantity: • Sales(selling price per unit) = Variable cost (per unit) + Fixed cost • To determine break-even in Sales Dollars: • Sales = Variable cost per unit + Fixed Costs

5. Break-even point—Contribution Margin method • Break-even in units = Fixed expenses/Unit contribution margin in dollars • Break-even in dollars = Fixed expenses/contribution margin ratio

6. Margin of Safety • The amount by which sales can drop before losses begin to be incurred. • In dollars • Total budgeted or actual sales – Break-even sales in dollars • In Percentage form: • Margin of safety in dollars/Total budgeted or actual sales

7. Operating Leverage • The measure of how sensitive net income is to a given percentage change in sales • Degree of operating leverage = Contribution margin/net income • The higher the degree of operating leverage, the larger the increase in net income.

8. Assumptions: • Unit selling price is constant • Costs are linear and can be accurately divided into variable and fixed elements • Sales mix is constant in multi-product companies • In manufacturing companies, inventories do not change