Chapter 6 - Cost-volume-profit relationships. After studying Chapter 6, you should be able to: Explain how changes in activity affect contribution margin and net income; compute the contribution margin ratio (CM ratio) and use it to compute changes in contribution margin and net income; show the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume;. | Cost-Volume-Profit Relationships Chapter6 The Basics of Cost-Volume-Profit (CVP) Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. The Basics of Cost-Volume-Profit (CVP) Analysis CM goes to cover fixed expenses. The Basics of Cost-Volume-Profit (CVP) Analysis After covering fixed costs, any remaining CM contributes to income. The Contribution Approach Consider the following information developed by the accountant at Wind Bicycle Co.: The Contribution Approach For each additional unit Wind sells, $200 more in contribution margin will help to cover fixed expenses and profit. The Contribution Approach Each month Wind must generate at least $80,000 in total CM to break even. The Contribution Approach If Wind sells 400 units in a month, it will be operating at the break-even point. The Contribution Approach If Wind sells one additional unit (401 bikes), net income will increase by $200. The Contribution Approach The break-even point can be defined either as: The point where total sales revenue equals total expenses (variable and fixed). The point where total contribution margin equals total fixed expenses. Contribution Margin Ratio The contribution margin ratio is: For Wind Bicycle Co. the ratio is: Contribution margin Sales CM Ratio = $200 $500 = 40% Contribution Margin Ratio At Wind, each $ increase in sales revenue results in a total contribution margin increase of 40¢. If sales increase by $50,000, what will be the increase in total contribution margin? Contribution Margin Ratio A $50,000 increase in sales revenue Contribution Margin Ratio A $50,000 increase in sales revenue results in a $20,000 increase in CM. ($50,000 × 40% = $20,000) Quick Check Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $ and the average variable expense per cup is $. The average fixed expense per month is $1,300. 2,100 cups are sold . | Cost-Volume-Profit Relationships Chapter6 The Basics of Cost-Volume-Profit (CVP) Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. The Basics of Cost-Volume-Profit (CVP) Analysis CM goes to cover fixed expenses. The Basics of Cost-Volume-Profit (CVP) Analysis After covering fixed costs, any remaining CM contributes to income. The Contribution Approach Consider the following information developed by the accountant at Wind Bicycle Co.: The Contribution Approach For each additional unit Wind sells, $200 more in contribution margin will help to cover fixed expenses and profit. The Contribution Approach Each month Wind must generate at least $80,000 in total CM to break even. The Contribution Approach If Wind sells 400 units in a month, it will be operating at the break-even point. The Contribution Approach If Wind sells one additional unit (401 bikes), net income will increase by $200. The Contribution Approach The .
