Copyright © 2008 Pearson Education Canada 6-1 Chapter 6 Contemporary Business Mathematics With Canadian Applications Eighth Edition S. A. Hummelbrunner/K.

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Copyright © 2008 Pearson Education Canada 6-1 Chapter 6 Contemporary Business Mathematics With Canadian Applications Eighth Edition S. A. Hummelbrunner/K. Suzanne Coombs PowerPoint: D. Johnston Break-Even and Cost-Volume-Profit Analysis

Copyright © 2008 Pearson Education Canada 6-2 Objectives After completing chapter five, the student will be able to: Compute break-even values using CVP relationships, contribution margin and contribution rate. Construct and interpret CVP charts. Compute the effects of changes to cost, volume and profit.

Copyright © 2008 Pearson Education Canada 6-3 Starting a Business

Copyright © 2008 Pearson Education Canada 6-4 Calculation of Net Income (Revenue - Total Cost)

Copyright © 2008 Pearson Education Canada 6-5 Cost-Volume-Profit Assumptions Revenue per unit of output (price) is constant. Total revenue varies directly with volume. Fixed costs remain constant over time period considered for all levels of output. Variable costs are constant per unit of output regardless of volume.

Copyright © 2008 Pearson Education Canada 6-6 Fixed Costs Rent Depreciation Property taxes Supervision and management salaries Fixed costs per unit of output decrease as volume increases because the total cost is spread out over more units.

Copyright © 2008 Pearson Education Canada 6-7 Variable Costs Direct material costs Direct labour costs Sales commissions Total variable costs increase or decrease as volume fluctuates.

Copyright © 2008 Pearson Education Canada 6-8 Break-even Analysis

Copyright © 2008 Pearson Education Canada 6-9 Break-even Point

Copyright © 2008 Pearson Education Canada 6-10 Finding the Break-even Point

Copyright © 2008 Pearson Education Canada 6-11 Expressing the Break-even Point

Copyright © 2008 Pearson Education Canada 6-12 Contribution Margin

Copyright © 2008 Pearson Education Canada 6-13 Calculating Break-even Point Using the Contribution Margin

Copyright © 2008 Pearson Education Canada 6-14 Break-even Chart

Copyright © 2008 Pearson Education Canada 6-15 Summary The break-even model is used to analyze the relationships among costs, volumes, and profits. The break-even point is that value at which the total revenue =total cost.