Managerial Accounting

CHAPTER 3

COST–VOLUME–PROFIT ANALYSIS

NOTATION USED IN CHAPTER 3 SOLUTIONS

SP: Selling price

VCU: Variable cost per unit

CMU: Contribution margin per unit

FC: Fixed costs

TOI: Target operating income

3-1 Cost-volume-profit (CVP) analysis examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, selling price, variable cost per unit, or fixed costs of a product.

3-2 The assumptions underlying the CVP analysis outlined in Chapter 3 are

1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units sold.

2. Total costs can be separated into a fixed component that does not vary with the units sold and a variable component that changes with respect to the units sold.

3. When represented graphically, the behaviors of total revenues and total costs are linear (represented as a straight line) in relation to units sold within a relevant range and time period.

4. The selling price, variable cost per unit, and fixed costs are known and constant.

3. Operating income is total revenues from operations for the accounting period minus cost of goods sold and operating costs (excluding income taxes):

Operating income = Total revenues from operations –

Net income is operating income plus nonoperating revenues (such as interest revenue) minus nonoperating costs (such as interest cost) minus income taxes. Chapter 3 assumes nonoperating revenues and nonoperating costs are zero. Thus, Chapter 3 computes net income as:

Net income = Operating income – Income taxes

3-4 Contribution margin is the difference between total revenues and total variable costs. Contribution margin per unit is the difference between selling price and variable cost per unit. Contribution-margin percentage is the contribution margin per unit divided by selling price.

3-5 Three methods to express CVP relationships are the equation method, the...