6-7 Three approaches to break-even analy-
fixed costs do not change, then a dollar increase
sis are (a) the graphical method, (b) the equa-
in contribution margin will result in a dollar in-
tion method, and (c) the contribution margin
crease in net operating income. The CM ratio
method.
In the graphical method, total cost and
can also be used in break-even analysis. There-
total revenue data are plotted on a graph. The
fore, for planning purposes, knowledge of a
product’s CM ratio is extremely helpful in fore-
intersection of the total cost and the total reve-
nue lines indicates the break-even point. The
casting contribution margin and net operating
graph shows the break-even point in both units
income.
and dollars of sales.
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