Lecture 3 Cost-Volume-Profit Analysis

Contribution Margin The Basic Profit Equation Break-even Analysis Solving for targeted profits

Contribution Margin  total sales revenue - total variable costs Unit Contribution Margin  unit sales price - unit variable costs

The Basic Profit Equation profit = sales - costs

The Basic Profit Equation profit = sales - costs  profit = sales - variable costs - fixed costs

The Basic Profit Equation profit = sales - costs  profit = sales - variable costs - fixed costs  profit + fixed costs = sales - variable costs

The Basic Profit Equation profit = sales - costs  profit = sales - variable costs - fixed costs  profit + fixed costs = sales - variable costs  profit + fixed costs = # of units x (unit selling price - unit variable cost)

The Basic Profit Equation profit = sales - costs  profit = sales - variable costs - fixed costs  profit + fixed costs = sales - variable costs  profit + fixed costs = # of units x (unit selling price - unit variable cost)  P + FC = Q x (SP - VC)

Break-Even Analysis Set profit = 0, plug in total fixed costs, unit selling price and unit variable cost, and solve for # of units. This is break-even analysis.  P + FC = Q x (SP - VC)  FC = Q x (SP - VC)

Target Dollar Profits Plug in for profits, total fixed costs, unit selling price and unit variable cost, and solve for # of units (Q). This calculates unit sales to achieve a targeted profit.  P + FC = Q x (SP - VC)

Target Selling Prices Plug in for profits, total fixed costs, unit variable cost, and sales volume, and solve for targeted selling price. This calculates the unit sales price to achieve a targeted profit.  P + FC = Q x (SP - VC)