After studying this chapter, you will know: Explain how changes in activity affect contribution margin and net operating income, prepare and interpret a cost volume-profit (CVP) graph and a profit graph, use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume. | Cost-Volume-Profit Relationships Chapter 3 Chapter 3: Cost-Volume-Profit Relationships Cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit by focusing their attention on the interactions among the prices of products, volume of activity, per unit variable costs, total fixed costs, and mix of products sold. It is a vital tool used in many business decisions such as deciding what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire. Learning Objective 3-1 Explain how changes in activity affect contribution margin and net operating income. Learning objective 3-1 is to explain how changes in activity affect contribution margin and net operating income. Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. The contribution income statement . | Cost-Volume-Profit Relationships Chapter 3 Chapter 3: Cost-Volume-Profit Relationships Cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit by focusing their attention on the interactions among the prices of products, volume of activity, per unit variable costs, total fixed costs, and mix of products sold. It is a vital tool used in many business decisions such as deciding what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire. Learning Objective 3-1 Explain how changes in activity affect contribution margin and net operating income. Learning objective 3-1 is to explain how changes in activity affect contribution margin and net operating income. Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behavior. The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. For example, let's look at a hypothetical contribution income statement for Racing Bicycle Company (RBC). Notice the emphasis on cost behavior. Variable costs are separate from fixed costs. The contribution margin is defined as the amount remaining from sales revenue after variable expenses have been deducted. Basics of Cost-Volume-Profit Analysis CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income. Contribution margin is used first to cover fixed expenses. Any remaining contribution margin contributes to net operating income. The Contribution Approach Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If Racing sells an additional .
