5. Cost volume profit

Question 1

Contribution Margin

Answer 1

The sales price less variable costs of the product - represents incremental profit earned on the sale

Question 2

Break-even point

Answer 2

Fixed costs / CM (per unit or ratio)

Note: always round up to the higher number.

When CM equals fixed cost, break even point is achieved. This is becuase CM only considers variable costs, so once we make enough to cover fixed as well, we will have net 0 income.

Question 3

Break-even point with multiple products

Answer 3

You need to calculate the WACM (Weighted average CM)

Total CM / Total Units

To get WACM Ratio:

Total CM / Total Sales

Question 4

Target PRofit

Answer 4

Fixed cost + Target Profit = MX

Question 5

Assumptions for cost volume profit analysis

Answer 5

selling price is constant, costs are linear and can be accuruately divided up into variable and fixed elements.

With multiproduct companies, the sales mix is constant.