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Cost,Volume and Profit Formulas Week 6

# Cost,Volume and Profit Formulas Week 6

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Week 6

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07/22/2013

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Cost, Volume and Profit Formulas 1
Cost, Volume and Profit FormulasAxial College of University of PhoenixInstructor:Submitted by:

Cost, Volume and Profit Formulas 2First in a business the accounting department plays a major role in the company.A company can not run successfully without using the formulas to help keep a companyfinancials in order. This helps with knowing the needs and the goals of the company bylooking at cost, volume and profit analysis. This analysis will show the accountingdepartment the components that will change the profit of a company.Cost, Volume, and Profit analysis uses five components. Which are as follows: (a)volume activity, (b) unit selling prices, (c) variable cost per unit, (d) fixed cost per unitand last (e) sales mix. All of these components mean totally different things. Sales isanother word for volume activity, this is the number of units that have been sold and theselling price for each unit. For example: If a Baby Alive was \$70.00 but you could gettwo for the price of one that means you would be paying \$35.00 for the cost of each BabyAlive. The unit selling price would be \$35.00. But there is variable cost per unit that isan expense that is used to produce the unit at this cost. This could mean making changesin cost per unit, meaning the raw material and or labor that it takes to produce a unit.Fixed cost per unit is somewhat the same as variable cost per unit but it does notchange the cost. Fixed cost can stay the same threw out the year. Which consist of monthly rent, utilities and sometimes taxes depending on how well a business has donethrew out the year. Because different stores sell different items at different prices thiswould be a mix number of sales know as sales mix. Everyone wants to have the best price on the Baby Alive so one company lower it’s price to bring more customer to their store.Contribution margin means: as a percentage of total sales is referred to ascontribution margin ratio

(CM Ratio). This could mean cost of unit selling price, unit

Cost, Volume and Profit Formulas 3variable cost and possible increase in selling price which could cause higher contributionmargins per unit. For example: Junk4U refurbished 150 computers which they will nowsell at \$300.00 per unit and a variable cost per unit was \$50.00, with the contributionmargin per unit being \$250.00. Meaning if Junk4U increased their price by \$350.00 per unit they would increase their contribution margin \$300.00. When Junk4U cost volumeis higher their fixed cost remains the same the cost per unit will decreases with thevolume of activity and the fixed cost. If Junk4U had a fixed cost \$45,000 a month andonly produced \$22,500 units it would only cost them \$50.00 per unit at 75 units beingsold.Contribution ratio- is the marginal profit per unit sale. It is a useful quantity incarrying out various calculations, and can be used as a measure of operating leverage.This leverage is used in a company for loss of profit, breaking even and the profit that thecompany will make. The total contribution margin (TCM) is Total Revenue (TR, or Sales) minus Total Variable Cost (TVC) meaning TCM=TR-TVC. The contributionmargin ratio is the percentage of the Contribution over Total Revenue, which can becalculated from the unit contribution over unit price or total contribution over TotalRevenue. (Wikipedia October 2009).