1. Principles of Managerial Accounting
Chapter 6

2. Cost-Volume-Profit (CVP) Analysis
CVP is used to predict the impact on profits with changes:
Selling price
Variable cost per unit
Sales volume
Total fixed costs.

3. Contribution Margin Contribution margin: Contribution margin ratio:
Sales minus variable costs. (Contribution to fixed costs and profits.)
Contribution margin ratio:
Contribution margin/sales
Break-even point – the point when sales equals Fixed plus Variable costs (zero profit)

4. Break-even point Break-even – equation method To determine quantity:
Sales(selling price per unit) = Variable cost (per unit) + Fixed cost
To determine break-even in Sales Dollars:
Sales = Variable cost per unit + Fixed Costs

5. Break-even point—Contribution Margin method
Break-even in units = Fixed expenses/Unit contribution margin in dollars
Break-even in dollars = Fixed expenses/contribution margin ratio

6. Margin of Safety
The amount by which sales can drop before losses begin to be incurred.
In dollars
Total budgeted or actual sales – Break-even sales in dollars
In Percentage form:
Margin of safety in dollars/Total budgeted or actual sales

7. Operating Leverage
The measure of how sensitive net income is to a given percentage change in sales
Degree of operating leverage = Contribution margin/net income
The higher the degree of operating leverage, the larger the increase in net income.

8. Assumptions: Unit selling price is constant
Costs are linear and can be accurately divided into variable and fixed elements
Sales mix is constant in multi-product companies
In manufacturing companies, inventories do not change