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Lecture Managerial accounting: Creating value in a dynamic business environment (10th edition): Chapter 7 - Ronald W. Hilton, David E. Platt

Chapter 7 - Cost-volume-profit analysis. After completing this chapter, you should be able to: Compute a break-even point using the contribution-margin approach and the equation approach; compute the contribution-margin ratio and use it to find the break-even point in sales dollars; prepare a cost-volume-profit (CVP) graph and explain how it is used;. | Cost-Volume-Profit Analysis Chapter 7 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 7: Cost-Volume-Profit Analysis The Break-Even Point The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal. 7- The break-even point is the volume of activity where the organization’s revenues and expenses are equal. At this amount of sales, the organization has no profit or loss; it breaks even. This chapter will introduce an income statement highlighting the distinction between variable and fixed expenses. The statement also shows the total contribution margin, which is total sales revenue minus total variable expenses. Total contribution margin is the amount of revenue that is available to contribute to covering fixed expenses after all variable expenses have been covered. (LO1) Equation Approach Sales revenue – Variable . | Cost-Volume-Profit Analysis Chapter 7 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 7: Cost-Volume-Profit Analysis The Break-Even Point The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal. 7- The break-even point is the volume of activity where the organization’s revenues and expenses are equal. At this amount of sales, the organization has no profit or loss; it breaks even. This chapter will introduce an income statement highlighting the distinction between variable and fixed expenses. The statement also shows the total contribution margin, which is total sales revenue minus total variable expenses. Total contribution margin is the amount of revenue that is available to contribute to covering fixed expenses after all variable expenses have been covered. (LO1) Equation Approach Sales revenue – Variable expenses – Fixed expenses = Profit Unit sales price Sales volume in units × Unit variable expense Sales volume in units × ($500 × X) ($300 × X) – – $80,000 = $0 ($200X) – $80,000 = $0 X = 400 surf boards 7- The equation approach can be used to find the break-even point. This approach is based on the profit equation. Income (or profit) is equal to sales revenue minus expenses. Expenses can be separated in variable and fixed expenses. At the break-even point, income is $0. (LO1) Contribution-Margin Approach For each additional surf board sold, Curl generates $200 in contribution margin. Consider the following information developed by the accountant at Curl, Inc.: 7- Curl, Inc. manufactures surf boards. Each surf board sells for $500 and has variable costs of $300. (LO2) Therefore, the contribution margin per unit is $200. When enough surf boards are sold so that the total contribution margin is $80,000, Curl Inc. will break even for the period. (LO2) Contribution-Margin Approach .