978 words - 4 pages

Assignment: Cost, Volume, and Profit Formulas

ACC220

February 19, 2012

Assignment: Cost, Volume, and Profit Formulas

In a business, it is profit that ultimately determines whether a business succeeds or fails a financial year. To aid in forming decisions, managers depend on information presented in Cost-Volume-Profit (CVP) analysis. In a CVP analysis, information is built on the interrelation of five general components. By understanding these components and how they relate to one-another, managers and accountants can also determine the contribution margin ratio. With these factors in hand, managers can predict the contribution ratios necessary to balance expenses and maximize profits. ...view middle of the document...

If I were to charge $15 for each dozen, then I would have a CMU of $8 ($15 - $7). However, raising sales prices without a legitimate reason might hurt my total sales over all, because I have to keep in mind that demand and competition are factors. If there is a high demand, but also high competition, I may lose sales to rivals who sell their cookies at a lower price.

In this case, a factor to determine proper sales price is fixed costs. Subtracting the fixed costs from the contributions margin determines my net income, and whether I profited from my business endeavors or I fallen below budget. When fixed costs are lowered, then I can afford to produce less or lower my sales price to break-even. Going back to the earlier example, let’s assume my fixed costs to maintain my business is $3000, which covers the mortgage and utilities. Assuming the variable costs of $7 per dozen and the sales costs of $12 per dozen, then I would need to produce and sell 600 dozen cookies to break-even ($12*600 - $7*600 = $3000). However, if I had purchased new equipment that uses less energy, I could hypothetically reduce my fixed costs due to energy saved (let’s assume $2800). Because of the lower fixed costs that I would need to cover, I only need to sell 560 dozen cookies to break-even ($12*560 - $7*560 = $2800). Any sold over that minimum will be counted as profit in my net income.

In many cases however, there are moments when I need to determine how many units I need to produce and sell ahead of time in order to my future income statements. In those moments, I rely on contribution ratios to predict the volume of sales required. Contribution ratios are determined by the contribution margin per unit divided by the sales price. Going back to the...

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