Cost-Volume-Profit Analysis:

Learning content:

Uses of Cost-Volume-Profit (CVP) Analysis; Break-even Analysis- Equation approach and contribution approach. Break-even Point and Shutdown Point; Graphical Approach of CVP Analysis; Margin of Safety, Degree of Operating Leverage (DOL); Assumptions and Limitations of CVP Analysis; Accounting View vs. Economics View of Break-even Point. 

Learning objectives:

1.  To Explain how changes in activity affect contribution and net operating income.

 2. To Prepare and interpret a cost-volume-profit (CVP) graph and a profit graph.

 3.  To use the contribution margin ratio to compute changes in contribution margin and net operating income resulting from changes in sales volume.

 4. To show the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume.

5. To determine the level of sales needed to achieve a desired target profit.

 6. To determine the break-even point.

 7. Compute margin of safety and its significance.

 8. Compute the degree of operating leverage and a particular levels of sales and explain how it can be used to predict changes in net operating income.

After studying this chapter students will be able to:

1. Explain how changes in activity affect contribution and net operating income.

 2. Prepare and interpret a cost-volume-profit (CVP) graph and a profit graph.

 3. Use the contribution margin ratio to compute changes in contribution margin and net operating income resulting from changes in sales volume.

 4. Show the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume.

5. Determine the level of sales needed to achieve a desired target profit.

 6. Determine the break-even point.

 7. Compute margin of safety and its significance.

 8. Compute the degree of operating leverage and a particular levels of sales and explain how it can be used to predict changes in net operating income