Ch-6 CVP Analisis

Chapter Six
Cost-Volume-Profit (CVP) Analysis

CVP Analysis
 CVP Analysis studies the behavior and relationship among
total revenues, total costs, and operating income as changes
occur in the units sold, the selling price, the variable cost per
unit, or the fixed costs of a product.
 CVP analysis, also commonly known as Break-Even Analysis,
is a way for companies to determine how changes in costs
(both variable and fixed) and sales volume affect a company’s
profit.
 With this information, companies can better understand overall
performance by looking at how many units must be sold to
break even or to reach a certain profit threshold or the margin of
safety (amount of sales above break-even point).
Cost & Mgt Acct. II (Mekonnen K.) 2021
Assumptions of CVP analysis
 Assumptions of CVP analysis for simplification of the analysis
are:
1. Changes in the levels of revenues and costs arise only because of
changes in the number of product (or service) units sold.
 The number of units sold is the only revenue and cost driver.
 A cost driver is any factor that affects costs, a revenue driver is
a variable, such as volume, that causally affects revenues.
2. Total costs can be separated into two components: a fixed
component that does not vary with units sold and a variable
component that changes with respect to units sold.
3. When represented graphically, the behaviors of total revenues and
total costs are linear (they can be represented as a straight line)
in relation to units sold within a relevant range and time period.
4. Selling price, variable cost per unit, and total fixed costs (within
a relevant range and time period) are known and constant.
 (i.e. each unit is sold at the same price; each unit costs the same
amount and costs such as rent, property taxes or insurance do not
vary with sales over the long term).
5. The CVP analysis either covers a single product or assumes
that the sales mix (when multiple products are sold), will
remain constant as the level of total units sold changes.
 For the purpose of CVP analysis, we assume that the company
produces and sales only one product or if there are more than
one products, we assume a constant sales mix.
 Sales mix refers to the relative proportion or combination of
quantity of output produced and sold that constitute total sales.
6. Time value of money is not considered.
7. Inventory change is zero (everything produced is sold)
 quantity of output sold in the period is the same as the quantity
of output produced in the same period.
Essentials of CVP Analysis
 The major terms and key concepts that are used in CVP analysis
are operating income, net income, and contribution margin.
 Operating income: is equal to total revenue from operation
minus cost of goods sold and all operating expenses.
 Net income: is operating income plus non-operating revenues
minus non-operating costs minus income tax. That is,
Net income = Operating income + non-operating revenue
- non-operating cost - income tax
 From what is given above, for the purpose of CVP analysis, we
assume non-operating revenue and non-operating cost as zero.
Therefore,
Net income = Operating income – Income tax

 Contribution margin (CM): it is the difference between total
revenues and total variable costs,
Contribution margin = Total revenues – Total variable

 Contribution margin indicates why operating income changes as
costs
the number of units sold changes.
 Contribution margin shows the aggregate amount of revenue
available after variable costs to cover fixed expenses and provide
profit.
 Contribution margin per unit (UCM): is a useful tool for
calculating contribution margin and operating income. It is
defined as,
Contribution margin per unit = Selling price - Variable cost per
unit
 Contribution margin per unit provides a second way to
calculate contribution margin:
Contribution margin = Contribution margin per unit X Number of
units sold
 Contribution margin percentage (CM%): is the contribution
margin per unit divided by the unit selling price. That is,
Contribution margin percentage = Contribution margin per
unit
Selling price
 Variable cost percentage (VC%): is the unit variable cost
divided by the unit selling price. That is,
VC% = Unit variable cost
Unit selling price

 For the purpose of illustration, let’s consider the following
example.
 Example: Emma Frost is considering selling GMAT Success, a test
prep book and software package for the business school admission
test, at a college fair in Chicago. Emma knows she can purchase this
package from a wholesaler at $120 per package, with the privilege of
returning all unsold packages and receiving a full $120 refund per
package. She also knows that she must pay $2,000 to the organizers
for the booth rental at the fair. She will incur no other costs. Emma
predicts that she can charge a price of $200 per package for GMAT
Success.
Required:
a) Calculate the unit contribution margin
b) Calculate the contribution margin percentage
c) Using a contribution income statement, calculate the total
contribution margin, and operating income (operating loss)
assuming that,
1) 0 units are sold
2) 1 units are sold
3) 5 units are sold
4) 25 units are sold
Solutions:
 Notice that the booth-rental cost of $2,000 is a fixed cost because
it will not change no matter how many packages Emma sells.
 The cost of the package ($120/package) itself is a variable cost
because it increases in proportion to the number of packages sold.
 Emma will incur a cost of $120 for each package that she
sells.
A. Contribution margin per unit = Selling price -Variable cost
per unit
= $200 - $120
= $80
 Notice that,
 Before she gets to the fair, Emma incurs $2,000 in fixed costs.
 Because the contribution margin per unit is $80, Emma will
recover $80 for each package that she sells at the fair.
 Emma hopes to sell enough packages to fully recover the
$2,000 she spent for renting the booth and to then start
making a profit.
B. Contribution margin percentage = Contribution margin per
unit
Selling price
CM% = $80 = 0.40 or 40%
$200
 CM% is the contribution margin per dollar of revenue.
 Emma earns 40% of each dollar of revenue (equal to 40
cents).
Exhibit 1.1: Contribution Income Statement for Different Quantities of GMAT Success Packages Sold
Exhibit 1-1 presents contribution margins for different quantities of
packages sold.
 The income statement in Exhibit 1-1 is called a contribution
income statement because it groups costs into variable costs
and fixed costs to highlight contribution margin.
 Each additional package sold from 0 to 1 to 5 increases
contribution margin by $80 per package, recovering more of the
fixed costs and reducing the operating loss.
 If Emma sells 25 packages, contribution margin equals $2,000
($80 per package*25 packages), exactly recovering fixed costs
and resulting in $0 operating income.
 If Emma sells 40 packages, contribution margin increases by
another $1,200 ($3,200-$2,000), all of which becomes operating
income.
 As you look across Exhibit 1-1 from left to right, you see that
the increase in contribution margin exactly equals the increase in
operating income (or the decrease in operating loss).
Breakeven Point
 The breakeven point (BEP) is that quantity of output sold at
which total revenues equal total costs- that is, the quantity of
output sold that results in $0 of operating income.
 Why would mangers be interested in the breakeven point?
 Mainly because they want to avoid operating losses, and the
breakeven point tells them what level of sales they must
generate to avoid a loss.
 Breakeven point can be determined by using:
1. the equation method,
2. the contribution margin method and
3. the graph method.

 For the purpose of illustration of the three methods, using the
data given for Emma Frost earlier, calculate the breakeven
quantity and revenue of Emma Frost using:
1) Equation method
2) Contribution margin method
3) Graphic method
Solution:
1) Equation Method
 Each column in Exhibit 1-1 is expressed as an equation.
Revenues -Variable costs - Fixed costs = Operating income
 How are revenues in each column calculated?
Revenues = Unit Selling price (USP) X Quantity of units sold
(Q)
 How are variable costs in each column calculated?
Variable costs = Variable cost per unit (VCU) X Quantity of units sold
(Q)
Therefore,
[(USP X Q) - (UVC X Q)] - Fixed costs = Operating
income……………(Equation 1)
Where, USP = Unit selling price
UVC = Unit variable cost
Q = Quantity of units sold
 Setting operating income equal to $0 and denoting quantity of
output units that must be sold by Q,
($200*Q) - ($120*Q) - $2,000 = $0
$80Q = $2,000
Q = $2,000 ÷ $80 per unit
BEQ = 25 units
 If Emma sells fewer than 25 units, she will incur a loss; if she sells
25 units, she will breakeven; and if she sells more than 25 units, she
will make a profit.
 This breakeven point can also be expressed in revenues as follows:
Breakeven revenue = Breakeven quantity X Unit selling price
= 25 units X $200 selling price
= $5,000
2) Contribution Margin Method
 Rearranging equation 1,
[(USP - UVC) X Q] - Fixed costs = Operating income
(UCM X Q) - Fixed costs = Operating income………….…
(Equation 2)
 At the breakeven point, operating income is by definition $0 so,
UCM*Breakeven number of units = Fixed cost..............
(Equation 3)
BEQ = Fixed Cost/UCM
 Thus,
Breakeven number of units = Fixed costs = $2,000 = 25 units
UCM $80
 Usually breakeven point in terms of revenues is calculated using
contribution margin percentages.
 Recall that in the GMAT Success example, That is, 40% of each dollar
of revenue, or 40 cents, is
CM % = UCM contribution margin.
USP
= $80 ÷ $200 = 0.40 or 40%
 To breakeven, contribution margin must equal fixed costs of
$2,000.
 To earn $2,000 of contribution margin, when $1 of revenue earns
$0.40 of contribution margin, revenues must equal $2,000 ÷ 0.40
= $5,000.
 Breakeven revenue = Fixed costs = $2,000

CM % 0.40
= $5,000
Proof
Total revenue –Total variable cost – Total fixed cost = 0
(25*200)–(25*120) - 2000 = 0
5000– 3000 - 2000 = 0
0=0

3) Graph Method
 In the graph method, we represent total costs and total revenues
graphically.
 Each is shown as a line on a graph. Because we have assumed
that total costs and total revenues behave in a linear fashion, we
need only two points to plot the line representing each of them.
1. Total costs line: The total costs line is the sum of fixed costs and
variable costs. Fixed costs are $2,000 for all quantities of units sold
within the relevant range.
1) To plot the total costs line, use as one point the $2,000 fixed
costs at zero units sold (point A) because variable costs are $0
when no units are sold. = (0, 2000)
2) Select a second point by choosing any other convenient output
level (say, 40 units sold) and determine the corresponding total
costs. Total variable costs at this output level are $4,800 (40
units X $120 per unit).
 Thus, Total costs at 40 units sold equal $6,800 ($2,000 +
$4,800), which is point B in Exhibit 1-2. = (40, 6800)
• The total costs line is Acct.
Cost & Mgt theII (Mekonnen
straight line from point A through
K.) 2021
2. Total revenues line:
1) One convenient starting point is $0 revenues at 0 units sold,
which is point C in Exhibit 1-2. = (0, 0)
2) Select a second point by choosing any other convenient output
level and determining the corresponding total revenues.
 At 40 units sold, total revenues are $8,000 ($200 per unit X
40 units), which is point D in Exhibit 1-2. = (40, 8000)
 The total revenues line is the straight line from point C
through point D.
 Profit or loss at any sales level can be determined by the vertical
distance between the two lines at that level in Exhibit 1-2.
 For quantities fewer than 25 units sold, total costs exceed total
revenues, and the purple area indicates operating losses.
 For quantities greater than 25 units sold, total revenues exceed
total costs, and the blue-green area indicates operating incomes.
 At 25 units sold, total revenues equal total costs and Emma
will break even by selling 25 packages.
Exhibit 1.2: CVP graph
 While the breakeven point tells managers how much they must
sell to avoid a loss, managers are equally interested in how they
will achieve the operating income targets underlying their
strategies and plans.
 In our example, selling 25 units at a price of $200 assures
Emma that she will not lose money if she rents the booth.
 This news is comforting, but we next describe how Emma
determines how much she needs to sell to achieve a targeted
amount of operating income.

Target Operating Income
 We illustrate target operating income calculations by asking the
following question:
 How many units (Q) must Emma sell to earn an operating
income of $1,200?
1) One approach is to keep plugging in different quantities into
Exhibit 1-1 and check when operating income equals $1,200.
 Exhibit 1-1 shows that operating income is $1,200 when 40
packages are sold.
2) A more convenient approach is to use equation-1 provided
earlier.
[(USP X Q) - (UVC X Q)] - Fixed costs = Target operating income (TOI)….
(Eq. 1)
 We denote by Q the unknown quantity of units Emma must sell to
earn an operating income of $1,200.
 Selling price is $200, variable cost per package is $120, fixed costs
are $2,000, and target operating income is $1,200.
 Substituting these values into equation 1,
($200 X Q) – ($120 X Q) - $2,000 = $1,200
$80 X Q = $2,000 + $1,200 = $3,200
Q = $3,200 ÷ $80 per unit
= 40 units
 Alternatively, we could use equation 2,
(UCM X Q) - Fixed costs = Target operating income……..….(Eq. 2)
 Given a target operating income ($1,200), we can rearrange terms
to get equation 4.
Quantity of units required to be sold = Fixed costs + TOI .…(Eq.

4)
UCM
 Quantity of units required to be sold = $2,000 + $1,200
$80 per unit
= 40 units
 The revenues needed to earn an operating income of $1,200
can also be calculated by using:
Revenues needed to earn an OI of $1,200 = Quantity of units required to be sold X

USP
Revenue = 40 units X $200
= $8,000
 The graph in Exhibit 1-2 is very difficult to use to answer the

question: How many units must Emma sell to earn an
operating income of $1,200? Why?
 Because it is not easy to determine from the graph the precise
point at which the difference between the total revenues line
and the total costs line equals $1,200.
 However, modifying Exhibit 1-2 in the form of a profit-volume
 A PV graph shows how changes in the quantity of units sold affect
operating income.
 Exhibit 1-3 is the PV graph for GMAT Success (fixed costs, $2,000;
selling price, $200; and variable cost per unit, $120).
 The PV line can be drawn using two points.
 One convenient point (M) is the operating loss at 0 units sold,
which is equal to the fixed costs of $2,000, shown at –$2,000 on
the vertical axis. = (0, -2000)
 A second convenient point (N) is the breakeven point, which is
25 units in our example.
 The PV line is the straight line from point M through point N. =
(25, 0)
 To find the number of units Emma must sell to earn an operating
income of $1,200, draw a horizontal line parallel to the x-axis
corresponding to $1,200 on the vertical axis (that’s the y-axis).
 At the point where this line intersects the PV line, draw a vertical
line down to the horizontal
Cost & Mgtaxis (that’s K.)the
Acct. II (Mekonnen 2021x-axis).
Exhibit 1.3: Profit-Volume Graph for GMAT Success
Target Net Income and Income Taxes
 Net income is equal to operating income plus non-operating
revenues (such as interest revenue) minus non-operating costs
(such as interest cost) minus income taxes.
 For simplicity, throughout this chapter we assume non-
operating revenues and non-operating costs are zero. Thus,
Net income = Operating income - Income taxes
 In many companies, the income targets for managers in their
strategic plans are expressed in terms of net income.
 That’s because top management wants subordinate managers to
take into account the effects their decisions have on operating
income after income taxes.
 To make net income evaluations, CVP calculations for target
income must be stated in terms of target net income instead of
target operating income.
 For example, Emma may be interested in knowing the quantity of
units she must sell to earn a net income of $960, assuming an
income tax rate of 40%.
Target net income = Target operating income – Income tax
Target net income = (Target operating income) – (Target OI X Tax
rate)
Target net income = (Target operating income) X (1 - Tax rate)
 Target operating income =
=
To earn a target net income of $960,
= $1,600 Emma’s target operating income is
$1,600.
Proof: Target operating income…………………………..…………………
$1,600
Tax at 40% (0.40 X $1,600)…………………...............................640
Target net income……………………………………….
……………….$960 Cost & Mgt Acct. II (Mekonnen K.) 2021
 Calculate the number of units Emma must sell to get the target
operating income from our GMAT Success example using equation
1.
[(USP X Q) - (UVC X Q)] - Fixed costs = Target Operating income…….(Eq. 1)
45 of
.
its
($200 X Q) - ($120 X Q) - $2,000 = $1,600
ell me
un
o s co
$80 X Q = $3,600
s t in
ed n g
Q = $3,600 ÷ $80 per unit
ne rati
= 45and
units
ma ope
 Using contribution margin method equation 4:
Em et
0, arg
,60 n t
$ 1 ear
To
Proof:
Revenues, $200 per unit X 45
units…………………………………………………………….……...$9,000
Variable costs, $120 per unit X 45
units……………………………………………………….……….5,400
Contribution
margin……………………………………………………………………………………..
…….3,600 Cost & Mgt Acct. II (Mekonnen K.) 2021
Fixed
 Calculate the revenues needed to earn a net income of $960
Revenues needed to earn a NI of $960 = Quantity of units required to be sold X
USP
= 45 units X $200 = $9,000
 Focusing the analysis on target net income instead of target

operating income will not change the breakeven point.
 That’s because, by definition, operating income at the
breakeven point is $0, and no income taxes are paid when there
is no operating income.
Using CVP Analysis for Decision Making
 Illustrate how CVP analysis can be used for strategic decisions
concerning advertising and selling price.
 Decision to Advertise
 Suppose Emma anticipates selling 40 units at the fair.
 Exhibit 1-3 indicates that Emma’s operating income will be
$1,200.
 Emma is considering placing an advertisement describing the
product and its features in the fair brochure.
 The advertisement will be a fixed cost of $500.
 Emma thinks that advertising will increase sales by 10%
to 44 packages.
 Should Emma advertise?
 The following table presents the CVP analysis.
 Operating income will decrease from $1,200 to $1,020, so
Emma should not advertise.
 Note that Emma could focus only on the difference column
and come to the same conclusion: If Emma advertises,
contribution margin will increase by $320 (revenues, $800 -
variable costs, $480), and fixed costs will increase by $500,
resulting in a $180 decrease in operating income.
 Decision to reduce Selling Price
 Having decided not to advertise, Emma is considering whether
to reduce the selling price to $175.
 At this price, she thinks she will sell 50 units.
 At this quantity, the test-prep package wholesaler who
supplies GMAT Success will sell the packages to Emma for
$115 per unit instead of $120.
 Should Emma reduce the selling price?
CM from lowering price to $175: ($175- $115) per unit * 50
units.................$3,000
CM from maintaining price at $200: ($200 - $120) per unit *
40 units............3,200
 Decreasing the price will reduce contribution margin by $200
Change in contribution margin from lowering
and, because the fixed costs of $2,000 will not change, it will
price………………….....$ (200)
also reduce operating income by $200.
 Emma should not reduce the selling price.
Sensitivity Analysis and Margin of Safety
 Before choosing strategies and plans about how to implement
strategies, managers frequently analyze the sensitivity of their
decisions to changes in underlying assumptions.
 Sensitivity analysis is a “what-if” technique that managers use
to examine how an outcome will change if the original predicted
data are not achieved or if an underlying assumption changes.
 In the context of CVP analysis, sensitivity analysis answers
questions such as,
 “What will operating income be if the quantity of units sold
decreases by 5% from the original prediction?” and
 “What will operating income be if variable cost per unit
increases by 10%?”
 Sensitivity analysis broadens managers’ perspectives to possible
outcomes that might occur before costs are committed.
 One aspect of sensitivity analysis is margin of safety.
 The margin of safety is the excess of an organization’s expected
future sales (in either revenue or units) above the breakeven point.
Margin of safety (in revenues) =Budgeted (or actual)
revenues - Breakeven revenues
Margin of safety (in units) =Budgeted (or actual) sales
 The margin of safety answers the “what-if” question:
quantity - Breakeven quantity
 If budgeted revenues are above breakeven and drop, how far
can they fall below budget before the breakeven point is
reached?
 Sales might decrease as a result of a competitor introducing a
better product, or poorly executed marketing programs, and so on.
 Assume that Emma has fixed costs of $2,000, a selling price of
$200, and variable cost per unit of $120.
 From Exhibit 1-1, if Emma sells 40 units, budgeted revenues
are $8,000 and budgeted operating income is $1,200.
 The breakeven point is 25 units or $5,000 in total revenues.
Solution;
Margin of safety (in revenue) = Budgeted revenues – Breakeven revenues
= $8,000 - $5,000 = $3,000
Margin of safety (in units) = Budgeted sales (units) – Breakeven sales
Sometimes
(units) = 40 - margin
25 = 15 of safety is expressed as a percentage:
units
 This result means that revenues would have to decrease

substantially, by 37.5%, to reach breakeven revenues.
 The high margin of safety gives Emma confidence that she is
unlikely to suffer a loss.
 If, however, Emma expects to sell only 30 units, budgeted
revenues would be $6,000 ($200 per unit X 30 units) and the
margin of safety would equal:
The analysis implies that if revenues decrease by more than

16.67%, Emma would suffer a loss.
 A low margin of safety increases the risk of a loss.
 If Emma does not have the tolerance for this level of risk,
she will prefer not to rent a booth at the fair.
 Sensitivity analysis is a simple approach to recognizing
uncertainty, which is the possibility that an actual amount will
deviate from an expected amount.
 Sensitivity analysisCostgives managers
& Mgt Acct. a good feel for the risks
II (Mekonnen K.) 2021
Cost Planning and CVP
 Managers have the ability to choose the levels of fixed and variable
costs in their cost structures.
 This is a strategic decision.
 In this section, we describe various factors that managers and
management accountants consider as they make this decision.
 Alternative Fixed-Cost/Variable-Cost Structures
 CVP- based sensitivity analysis highlights the risks and returns as
fixed costs are substituted for variable costs in a company’s cost
structure.
 As an example in Exhibit 1-4 below, compare line 6 and line 11.
$2000

 Compared to line 6, line 11, with higher fixed costs, has more
risk of loss (has a higher breakeven point) but requires fewer
units to be sold (48 versus 50) to earn operating income of
$2,000.
 CVP analysis can help managers evaluate various fixed-
cost/variable-cost structures.
 To see the effects of these choices in more detail, Suppose the
Chicago college fair organizers offer Emma three rental
alternatives:
Option 1: $2,000 fixed fee
Option 2: $800 fixed fee plus 15% of GMAT Success
revenues
Option 3: 25% of GMAT Success revenues with no
fixed fee
 Emma’s variable cost per unit is $120.
 Emma is interested in how her choice of a rental agreement
will affect the income
Cost &she earns
Mgt Acct. andK.)the
II (Mekonnen 2021 risks she faces.
 The line representing Option 2 shows fixed costs of $800 and a
contribution margin per unit of $50 [selling price, $200, minus
variable cost per unit, $120, minus variable rental fees per unit, $30,
(0.15 X $200)].
 The line representing Option 3 has fixed costs of $0 and a
contribution margin per unit of $30 [$200 - $120 - $50 (0.25 X
$200)].
 Option 3 has the lowest breakeven point (0 units), and
 Option 1 has the highest breakeven point (25 units).
 Option 1 has the highest risk of loss if sales are low, but it has also
the highest contribution margin per unit ($80) and hence the highest
operating income when sales are high (greater than 40 units).
 The choice among Options 1, 2, and 3 is a strategic decision
that Emma faces.
 As in most strategic decisions, what she decides now will
significantly affect her operating income (or loss), depending on
the demand for GMAT Success.
 Faced with this uncertainty, Emma’s choice will be influenced
 If, however, Emma is averse to taking risk, she will prefer
Option 3, where the rewards are smaller if sales are high but
where she never suffers a loss if sales are low.
Exhibit 1-5: Profit-Volume Graph for Alternative Rental Options for GMAT Success
 Operating Leverage
 The risk-return trade-off across alternative cost structures can be
measured as operating leverage.
 Operating leverage describes the effects that fixed costs have on
changes in operating income as changes occur in units sold and
contribution margin. It measures the sensitivity of a company’s
operating income to its sales.
 Organizations with a high proportion of fixed costs in their cost
structures, as is the case under Option 1, have high operating leverage.
 The line representing Option 1 in Exhibit 1-5 is the steepest of the
three lines.
 Small increases in sales lead to large increases in operating
income.
 Small decreases in sales result in relatively large decreases in
operating income, leading to a greater risk of operating losses.
 At any given level of sales,
 The following table shows the degree of operating leverage at sales
of 40 units for the three rental options.
 These results indicate that, when sales are 40 units, a 1% change in sales and
contribution margin will result in 2.67 times that percentage change in
operating income for Option 1, but the same percentage change will result
(1.00 times) in operating income for Option 3.
Example, a sales increase of 50% from 40 to 60 units.
 Contribution margin will increase by 50% under each option.
 Operating income, however, will increase by 2.67 X 50% = 133% from
$1,200 to $2,800 in Option 1, but it will increase by only 1.00 X 50% =
50% from $1,200 to $1,800 in Option 3 (see Exhibit 1-5).
 The degree of operating leverage at a given level of sales helps managers
Limitation of CVP Analysis
The following are the limitations of Cost Volume Profit Analysis:
1. Segregation of total costs into its fixed and variable components is
difficult to do.
2. Fixed costs are unlikely to stay constant as output increases beyond a
certain range of activity.
3. The analysis is restricted to the relevant range specified and beyond
that the results can be unreliable
4. Besides volume, other elements like inflation, efficiency, capacity
and technology can affect costs
5. Impractical to assume sales mix remain constant since this depend
on the changing demand levels.
6. The assumption of linear property of total cost and total revenue
relies on the assumption that unit variable cost and selling price are
constant. However, this is likely to be valid within relevant range
only.
End of Chapter Five
Thank You!!!

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Chapter Six

Cost-Volume-Profit (CVP) Analysis

Cost & Mgt Acct. II (Mekonnen K.) 2021

Contribution margin = Total revenues – Total variable

Cost & Mgt Acct. II (Mekonnen K.) 2021

Cost & Mgt Acct. II (Mekonnen K.) 2021

 Breakeven revenue = Fixed costs = $2,000

Cost & Mgt Acct. II (Mekonnen K.) 2021

Cost & Mgt Acct. II (Mekonnen K.) 2021

Quantity of units required to be sold = Fixed costs + TOI .…(Eq.

Revenues needed to earn an OI of $1,200 = Quantity of units required to be sold X

 The graph in Exhibit 1-2 is very difficult to use to answer the

 Focusing the analysis on target net income instead of target

 This result means that revenues would have to decrease

The analysis implies that if revenues decrease by more than

Cost & Mgt Acct. II (Mekonnen K.) 2021

Cost & Mgt Acct. II (Mekonnen K.) 2021

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