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In: Accounting

What does CVP Analysis stand for? What type of income statement must be used when performing...

What does CVP Analysis stand for? What type of income statement must be used when performing CVP Analysis? What is the target profit when solving for the break-even point? The formulas to find Target profit and/or Break-even point in units and Target profit and/or break-even point in dollars differs by one number. Explain how these formulas are alike and the one number that makes them different.

Solutions

Expert Solution

The contribution margin income statement must be used when performing CVP Analysis because this income statement breaks out the variable and fixed expenses separately. Variable expenses like variable production costs, such as raw materials, direct labor and variable marketing and administrative expenses, such as commission expenses and the salaries of supervisors. The fixed expenses like production and overhead costs, such as building and equipment maintenance costs, insurance and administration.
The Target Profit when solving for the break-even point is 'Zero' i.e, the Total contribution should be equal to fixed cost.
The formulas to find Target profit and/or Break-even point in units
Fixed cost / Contribution per unit to find Break -even point in units
Fixed cost + Target profit / Contribution per unit to find Target profit in units
Formula to   find Target profit and/or break-even point in dollars
Fixed cost / PV ration to find Break-even point in dollars
Fixed cost + Target Profit / PV ration to find Target profit in dollars
These formulas are alike because the result of the formula is to find the Break even point or traget profit. The purpose is the same in both the formulas
One formula shows the result in number of units to be sold to achieve target profit or for finding break-even point.
The other formula shows the value in sales to achieve target profit or reach break-even sales
Example
Sale price per unit: $200
Variable costs per unit: $100
Total fixed costs: $100,000
Target profits: $100,000
Contribution = Sales - variable cost. So, $200-$100= $100
Fixed cost / Contribution per unit   : $100,000/100 = 1000 Units
PV ration = Contribuion / Sales x 100 : $100/$200 x100 = 50%
Fixed Cost / PV ratio : $100,000/50% = $200,000 Sales value
Now, Break even poin in units is 1000 units or 1000 units x $200 per unit = $200,000 which is Break even poin in dollars
To find Target profit Fixed cost + Target profit / Contribution per unit
$100,000 + $100,000/100 = 2000 Units
Fixed Cost + Target profit / PV ratio : $100,000 + $100,000/50% = $400,000 Sales value

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