Question

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350-700 words : explaining the components of cost-volume-profit analysis. what does each of teh components mean? based on teh formulas you have reviewed, what happens to contribution margin per unit when unit selling prices increase? illustrate your explanation with an example from a fictitious co. of how an increase in unit selling prices might affect contribution margin... when fixed costdecrease, what does this do for sales? illustrate your explanation with an example from a fictitiouse comapny. define contribution rations...what happens to contribution ratios as one of the components changes?



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Unit Selling

Price = Unit Variable

Costs

Contribution Margin

- per Unit

$500 - $300 = $200

Contribution margin per unit indicates that for every CD/DVD sold, Vargo

will have $200 to cover fixed costs and contribute to net income. Because Vargo

Video has fixed costs of $200,000, it must sell 1,000 CD/DVDs ($200,000_$200)

before it earns any net income. Vargo's CVP income statement, assuming a zero

net income, would report the following.

VARGO VIDEO COMPANY

CVP Income Statement

For the Month Ended June 30, 2002

Illustration 6-12 Formula

for contribution

margin per unit





Contribution Margin Ratio

Some managers prefer to use a contribution margin ratio in CVP analysis. The

contribution margin ratio is the contribution margin per unit divided by the

unit selling price. For Vargo Video, the ratio is as follows.

266 CHAPTER 6 Cost-Volume-Profit Relationships

= Unit Selling

Price

Contribution Margin

÷ Ratio

$200 ÷ $500 = 40%

Illustration 6-15 Formula

for contribution margin ratio



Mathematical Equation

A common equation used for CVP analysis is shown in Illustration 6-17.

Identifying the break-even point is a special case of CVP analysis. Because at the

break-even point net income is zero, break-even occurs where total sales equal

variable costs plus fixed costs.

The break-even point in units can be computed directly from the equation

by using unit selling prices and unit variable costs. The computation for Vargo

Video is:

?

S T U D Y O B J E C T I V E

6

Identify the three ways to

determine the break-even

point.

Variable +

Costs Sales = Fixed

Costs + Net

Income

Illustration 6-17 Basic

CVP



Sales =

$500Q = $300Q + $200,000 + $0

$200Q = $200,000

Q = 1,000 units

Q = sales volume

where

$500 = selling price

$300 = variable cost per unit

$200,000 = total fixed costs

Fixed

Costs + Net

Income

Thus, Vargo Video must sell 1,000 units to break even.

To find sales dollars required to break even, we multiply the units sold at

the break-even point times the selling price per unit, as shown below.

1,000 _ $500 _ $500,000 (break-even sales dollars)

Illustration 6-18 Computation

of break-even

point in units

Fixed

Costs = Contribution

Margin per Unit

Break-even

÷ Point in Units

Illustration 6-19 Formula

for break-even point

in units using contribution margin



Costs = Contribution

Margin Ratio

Break-even

÷ Point in Dollars

Illustration 6-20 Formula

for break-even point

in dollars using contribution

margin ratio

For Vargo Video, the contribution margin per unit is $200, as explained earlier.

Thus, the break-even point in units is:

$200,000 _ $200 _ 1,000 units

When the contribution margin ratio is used, the formula to compute break-even

point in dollars is: