Cost, Volume and Profit Formulas 1

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Cost, Volume and Profit Formulas 2 First 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 company financials in order. This helps with knowing the needs and the goals of the company by looking at cost, volume and profit analysis. This analysis will show the accounting department 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 unit and last (e) sales mix. All of these components mean totally different things. Sales is another word for volume activity, this is the number of units that have been sold and the selling price for each unit. For example: If a Baby Alive was $70.00 but you could get two for the price of one that means you would be paying $35.00 for the cost of each Baby Alive. The unit selling price would be $35.00. But there is variable cost per unit that is an expense that is used to produce the unit at this cost. This could mean making changes in 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 not change 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 done threw out the year. Because different stores sell different items at different prices this would 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 its price to bring more customer to their store. Contribution margin means: as a percentage of total sales is referred to as contribution margin ratio (CM Ratio). This could mean cost of unit selling price, unit

Cost, Volume and Profit Formulas 3 variable cost and possible increase in selling price which could cause higher contribution margins per unit. For example: Junk4U refurbished 150 computers which they will now sell at $300.00 per unit and a variable cost per unit was $50.00, with the contribution margin 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 volume is higher their fixed cost remains the same the cost per unit will decreases with the volume of activity and the fixed cost. If Junk4U had a fixed cost $45,000 a month and only produced $22,500 units it would only cost them $50.00 per unit at 75 units being sold. Contribution ratio- is the marginal profit per unit sale. It is a useful quantity in carrying 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 the company will make. The total contribution margin (TCM) is Total Revenue (TR, or Sales) minus Total Variable Cost (TVC) meaning TCM=TR-TVC. The contribution margin ratio is the percentage of the Contribution over Total Revenue, which can be calculated from the unit contribution over unit price or total contribution over Total Revenue. (Wikipedia October 2009).

Cost, Volume and Profit Formulas 4 References Axia College of University of Phoenix. (2009). Cost-Volume-Profit Relationships. Axia College, Week Six reading, aXcess, ACC 220- Survey of Accounting: The Maze of Numbers.

www.Wikipedia.com Last modified October 27, 2009