From the course: Accounting Foundations: Managerial Accounting
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The CVP equation
From the course: Accounting Foundations: Managerial Accounting
The CVP equation
- Contribution margin calculations are very useful when analyzing cost volume profit relationships in the management planning process. Doing CVP analysis, using contribution margin calculations is a straightforward process, though, it does require some simple algebra. We begin this topic with the assumption that all costs can be described as either fixed or variable. To highlight the important idea that CVP analysis depends on dividing costs into fixed and variable behavior patterns, we will develop the CVP equation as follows. First, because all costs can be classified as either variable or fixed, we can express the calculation of profit with the following basic formula. Sales revenues, less variable costs, less fixed costs equals our profit. And second, we can specify the formula more precisely by expressing the equation in units. That is our sales price times the number of units, less our variable costs, times the number of units less our fixed costs equals profit. This equation is…
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