{"id":75,"date":"2021-01-26T22:00:42","date_gmt":"2021-01-26T22:00:42","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=75"},"modified":"2021-06-10T18:56:23","modified_gmt":"2021-06-10T18:56:23","slug":"introduction-to-profitability-analysis","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/introduction-to-profitability-analysis\/","title":{"raw":"Introduction to Profitability Analysis","rendered":"Introduction to Profitability Analysis"},"content":{"raw":"<h2>What you\u2019ll learn to do: use the contribution margin model for Cost-Volume-Profit analysis<\/h2>\r\nThe basis for Cost-Volume-Profit (CVP) analysis is the Contribution Margin Income Statement:\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352530&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=fyAEVKCSjcI&amp;video_target=tpm-plugin-lic87iwj-fyAEVKCSjcI\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/ContributionMarginIncomeStatement_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Contribution Margin Income Statement\" here (opens in new window)<\/a>.\r\n\r\nLet\u2019s revisit BlankBooks. From the accounting records, you were able to build this CVP model based on the company producing an estimated 2,500 units in July:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>BlankBooks, Inc.\r\nCVP Analysis\r\nFor the month ending July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Units<\/th>\r\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">2,500<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a025,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">2,500<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\r\n<td class=\"r\">20,750.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>4,250.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0850.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM ratio<\/td>\r\n<td><\/td>\r\n<td class=\"r\">17.00%<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nBut now what?\r\n\r\nManagers use the CVP analysis for planning, making projections, and for decision-making purposes. They use the model to calculate a breakeven sales volume, to figure out the sales volume required to reach a certain target profit, and to run \u201cwhat-if\u201d scenarios. In this section, you\u2019ll be learning exactly how to use this tool to accomplish those tasks.\r\n\r\nIf you\u2019d like to use Excel, Numbers, Google Sheets, or some other spreadsheet program for your analysis, here is a sample of the template with formulas (from Microsoft \u00ae Excel for MAC version 16.44):\r\n\r\n<img class=\"alignnone wp-image-679\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/11194416\/2.2-Introduction-to-Profitability-Analysis-300x179.png\" alt=\"Example of an Excel Sheet\" width=\"643\" height=\"384\" \/>\r\n\r\nWhen you are done with this section, you will be able to:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate break-even point<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate target profit<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Demonstrate how changes in cost, volume, and selling price affect profit<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate margin of safety<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate operating leverage<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate multiple product break-even points<\/li>\r\n<\/ul>\r\n<h3>Learning Activities<\/h3>\r\nThe learning activities for this section include the following:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Break-Even<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Break-Even<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Target Profit<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Target Profit<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Sensitivity Analysis<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Sensitivity Analysis<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Margin of Safety<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Margin of Safety<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Operating Leverage<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Operating Leverage<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Sales Mix<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Sales Mix<\/li>\r\n<\/ul>","rendered":"<h2>What you\u2019ll learn to do: use the contribution margin model for Cost-Volume-Profit analysis<\/h2>\n<p>The basis for Cost-Volume-Profit (CVP) analysis is the Contribution Margin Income Statement:<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352530&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=fyAEVKCSjcI&amp;video_target=tpm-plugin-lic87iwj-fyAEVKCSjcI\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/ContributionMarginIncomeStatement_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Contribution Margin Income Statement&#8221; here (opens in new window)<\/a>.<\/p>\n<p>Let\u2019s revisit BlankBooks. From the accounting records, you were able to build this CVP model based on the company producing an estimated 2,500 units in July:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>BlankBooks, Inc.<br \/>\nCVP Analysis<br \/>\nFor the month ending July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Units<\/th>\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">2,500<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a025,000.00<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">2,500<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\n<td class=\"r\">20,750.00<\/td>\n<\/tr>\n<tr>\n<td>Contribution Margin<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>4,250.00<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0850.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>CM ratio<\/td>\n<td><\/td>\n<td class=\"r\">17.00%<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>But now what?<\/p>\n<p>Managers use the CVP analysis for planning, making projections, and for decision-making purposes. They use the model to calculate a breakeven sales volume, to figure out the sales volume required to reach a certain target profit, and to run \u201cwhat-if\u201d scenarios. In this section, you\u2019ll be learning exactly how to use this tool to accomplish those tasks.<\/p>\n<p>If you\u2019d like to use Excel, Numbers, Google Sheets, or some other spreadsheet program for your analysis, here is a sample of the template with formulas (from Microsoft \u00ae Excel for MAC version 16.44):<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-679\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/11194416\/2.2-Introduction-to-Profitability-Analysis-300x179.png\" alt=\"Example of an Excel Sheet\" width=\"643\" height=\"384\" \/><\/p>\n<p>When you are done with this section, you will be able to:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate break-even point<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate target profit<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Demonstrate how changes in cost, volume, and selling price affect profit<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate margin of safety<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate operating leverage<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Calculate multiple product break-even points<\/li>\n<\/ul>\n<h3>Learning Activities<\/h3>\n<p>The learning activities for this section include the following:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Break-Even<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Break-Even<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Target Profit<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Target Profit<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Sensitivity Analysis<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Sensitivity Analysis<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Margin of Safety<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Margin of Safety<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Operating Leverage<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Operating Leverage<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Reading: Sales Mix<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Self Check: Sales Mix<\/li>\n<\/ul>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-75\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Introduction to Profitability Analysis. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Contribution Margin Income Statement. <strong>Authored by<\/strong>: Kristin Ingram. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/fyAEVKCSjcI\">https:\/\/youtu.be\/fyAEVKCSjcI<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":5,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Introduction to Profitability Analysis\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Contribution Margin Income Statement\",\"author\":\"Kristin Ingram\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/fyAEVKCSjcI\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-75","chapter","type-chapter","status-publish","hentry"],"part":23,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/75","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":12,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/75\/revisions"}],"predecessor-version":[{"id":2147,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/75\/revisions\/2147"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/23"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/75\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/media?parent=75"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=75"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=75"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/license?post=75"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}