3

COST-VOLUME-PROFIT ANALYSIS AND PRICING DECISIONS

After studying this chapter, you should be able to meet the following learning objectives (LO).

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  1. Calculate the breakeven point in units and sales dollars. (Unit 3.1)
  2. Calculate the level of activity required to meet a target income. (Unit 3.2)
  3. Determine the effects of changes in sales price, cost, and volume on operating income. (Unit 3.2)
  4. Define operating leverage and explain the risks associated with the tradeoff between variable and fixed costs. (Unit 3.2)
  5. Calculate the multiproduct breakeven point and level of activity required to meet a target income. (Unit 3.3)
  6. Define markup and explain cost-plus pricing. (Unit 3.4)
  7. Explain target costing and calculate a target cost. (Unit 3.4)

The Pitch

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Martin Keck, vice president for sales at Universal Sports Exchange, was talking with his sales team at the monthly sales meeting. “As you know, the company missed its sales target last year. We were expecting to sell 10% more jerseys than we did. And we all saw the effect that the lower sales level had on our bottom line. When we miss our sales targets, it affects what everyone else in the company can accomplish because they count on us to generate revenue.”

Sarah Yardley, one of the company's top salespeople, had been listening intently ...

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