Week 4 Reflection
According to ACCOUNTING: TOOLS FOR BUSINESS DECISION MAKING the, “CVP is so important for decision making, management often wants this information reported in a CVP income statement format for internal use” (Kimmel PhD, Weygandt PhD, & Kieso PhD, pg. 978). When determining the cost-volume-profit in relationship to the contribution margin, per unit amount can be reflected as a ratio. First analysts and accountants find the contribution margin by determining the amount of revenue left over after deducting all of the variable costs. To find the units needed for the break-even point for a company divide the fixed costs by the contribution margin. Analysts can also find the break-even point in dollars by taking the fixed costs and dividing by the contribution ratio. Accountants can also find the target net income by using the various formulas to determine the number of units of the sales dollar amounts needed to hit the target by simply adding the target net income to the fixed costs before making their contribution margin calculations. Another important consideration in determining CVP, break-even points, and targets is the margin of safety involved in the process. Margin of safety determines “how far sales can drop before the company will be operating at a loss” (Kimmel PhD, Weygandt PhD, & Kieso PhD, pg. 981). Another factor of determining Break-even points and CVP is determining a company’s sales mix, if any. Most companies sale multiple types of products. To determine the break-even point for a company with a large sales mix, the company must use a weighted-average contribution margin ratio mix as opposed to a weighted average unit contribution mark that should be used for companies with smaller mixes.
Reference
Kimmel PhD, P. D., Weygandt PhD, J. J., & Kieso PhD, D. E. (2011). ACCOUNTING: TOOLS FOR BUSINESS DECISION MAKING (4th Ed.). Hoboken, NJ: John Wiley & Sons, Inc.