{"id":317,"date":"2018-04-16T23:44:40","date_gmt":"2018-04-16T23:44:40","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=317"},"modified":"2024-04-29T16:53:59","modified_gmt":"2024-04-29T16:53:59","slug":"cost-volume-profit-analysis-and-decision-making","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/cost-volume-profit-analysis-and-decision-making\/","title":{"raw":"Cost-Volume-Profit Analysis and Decision Making","rendered":"Cost-Volume-Profit Analysis and Decision Making"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Explain why changes to key cost-volume-profit factors can significantly affect planning and decision making<\/li>\r\n<\/ul>\r\n<\/div>\r\nYou just got a message from purchasing that the main component in your dry erase markers has gone up by 50 percent! You get out your calculator and start working on how this will affect your contribution margin this quarter. How are you going to explain this one to your supervisor? What are your options to keep your contribution margin high enough to cover the rest of your company\u2019s expenses without a massive price increase in the product? Let\u2019s get to work figuring out what to do.\r\n\r\nSo we talked about the key components of how many products we sell, what costs are involved in making those products and how they interrelate to create a profit or a loss. As a manager, you may be responsible for making sure that costs are kept under control, or \u00a0sales numbers are kept at a certain level to keep your company profitable.\r\n\r\nEven a slight change in costs can have a significant effect on the profitability of a company. Looking back at the contribution margin from the Monte Corporation example, let\u2019s look at how small cost changes might affect the overall profitability of the company. An increase from a supplier of $1 per widget seems insignificant when you look at one widget, but what happens as sales volume goes up and down? What if your rent goes up or you are hit with a sales slump?\r\n\r\nMaybe you choose to take production overseas, or purchase a machine to replace employees. CVP analysis helps you to make these decisions.\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=4306769&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=v1l6WPPSF_Y&amp;video_target=tpm-plugin-034r1uoi-v1l6WPPSF_Y\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nMonte Corporation has the following information available to you:\r\n<ul>\r\n \t<li>Selling price of the widget- $10<\/li>\r\n \t<li>Current variable expense per widget $4.00<\/li>\r\n \t<li>Fixed costs $400 per month<\/li>\r\n<\/ul>\r\nThey are notified by a vendor that the cost for the main component is going from $1.00 each to $2.00 each, which will bring their variable expense per widget to $5. How will this affect their contribution margin?\r\n\r\n$10.00 \u2212 $4.00= $6.00 is now going to be $10.00 \u2212 $5.00= $5.00\r\n\r\nRemember the contribution margin is how many dollars are available from the sale of each widget to cover fixed expenses.\r\n\r\nThe contribution margin ratio was 60% and is now going to be 50%. This is a huge difference for a $1.00 increase in component price. As we work through this module, keep in mind ways to possibly decrease costs, increase price, or other ways to save money on manufacturing. As a manager, you will have many decisions to make, sometimes they may be tough ones.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/27d55d61-6b22-441d-8a39-9cce0ec5a112\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Explain why changes to key cost-volume-profit factors can significantly affect planning and decision making<\/li>\n<\/ul>\n<\/div>\n<p>You just got a message from purchasing that the main component in your dry erase markers has gone up by 50 percent! You get out your calculator and start working on how this will affect your contribution margin this quarter. How are you going to explain this one to your supervisor? What are your options to keep your contribution margin high enough to cover the rest of your company\u2019s expenses without a massive price increase in the product? Let\u2019s get to work figuring out what to do.<\/p>\n<p>So we talked about the key components of how many products we sell, what costs are involved in making those products and how they interrelate to create a profit or a loss. As a manager, you may be responsible for making sure that costs are kept under control, or \u00a0sales numbers are kept at a certain level to keep your company profitable.<\/p>\n<p>Even a slight change in costs can have a significant effect on the profitability of a company. Looking back at the contribution margin from the Monte Corporation example, let\u2019s look at how small cost changes might affect the overall profitability of the company. An increase from a supplier of $1 per widget seems insignificant when you look at one widget, but what happens as sales volume goes up and down? What if your rent goes up or you are hit with a sales slump?<\/p>\n<p>Maybe you choose to take production overseas, or purchase a machine to replace employees. CVP analysis helps you to make these decisions.<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=4306769&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=v1l6WPPSF_Y&amp;video_target=tpm-plugin-034r1uoi-v1l6WPPSF_Y\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>Monte Corporation has the following information available to you:<\/p>\n<ul>\n<li>Selling price of the widget- $10<\/li>\n<li>Current variable expense per widget $4.00<\/li>\n<li>Fixed costs $400 per month<\/li>\n<\/ul>\n<p>They are notified by a vendor that the cost for the main component is going from $1.00 each to $2.00 each, which will bring their variable expense per widget to $5. How will this affect their contribution margin?<\/p>\n<p>$10.00 \u2212 $4.00= $6.00 is now going to be $10.00 \u2212 $5.00= $5.00<\/p>\n<p>Remember the contribution margin is how many dollars are available from the sale of each widget to cover fixed expenses.<\/p>\n<p>The contribution margin ratio was 60% and is now going to be 50%. This is a huge difference for a $1.00 increase in component price. As we work through this module, keep in mind ways to possibly decrease costs, increase price, or other ways to save money on manufacturing. As a manager, you will have many decisions to make, sometimes they may be tough ones.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_27d55d61-6b22-441d-8a39-9cce0ec5a112\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/27d55d61-6b22-441d-8a39-9cce0ec5a112?iframe_resize_id=assessment_practice_id_27d55d61-6b22-441d-8a39-9cce0ec5a112\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\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-317\">\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>Cost-Volume-Profit Analysis and Decision Making. <strong>Authored by<\/strong>: Freedom Learning Group. <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>Why use CVP Analysis?. <strong>Authored by<\/strong>: Rutgers Accounting Web. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/v1l6WPPSF_Y\">https:\/\/youtu.be\/v1l6WPPSF_Y<\/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":62559,"menu_order":8,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Cost-Volume-Profit Analysis and Decision Making\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Why use CVP Analysis?\",\"author\":\"Rutgers Accounting Web\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/v1l6WPPSF_Y\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"dc56bf57-db2b-4204-86cd-956f645aef7f, ee2d51a5-c444-4a37-984e-40a5e54027cf","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-317","chapter","type-chapter","status-publish","hentry"],"part":107,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/317","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":10,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/317\/revisions"}],"predecessor-version":[{"id":4086,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/317\/revisions\/4086"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/107"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/317\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=317"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=317"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=317"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=317"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}