After studying chapter 5, you should be able to: 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 05 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: 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. 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 . | Cost-Volume-Profit Relationships Chapter 05 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: 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. 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. Contribution Margin Ratio (CM Ratio) $100,000 ÷ $250,000 = 40% The CM ratio is calculated by dividing the total contribution margin by total sales. The contribution margin ratio is calculated by dividing the total contribution margin by total sales. In the case of Racing Bicycle, the ratio is 40%. Thus, each $ increase in sales results in a total contribution margin increase of 40¢. Contribution Margin Ratio (CM Ratio) The contribution margin ratio at Racing Bicycle is: The CM ratio can also be calculated by dividing the contribution .
