5. Cost Volume Profit Analysis

Question 1

At the breakeven point, what is the relationship between total contribution and total fixed costs?

Answer 1

At the breakeven point, total contribution = total fixed costs

Question 2

Number of units to be sold to breakeven is calculated as:

Answer 2

Number of units to be sold to breakeven = total fixed cost / unit contribution

Question 3

The sales volume to achieve a target profit is calculated as:

Answer 3

Sales volume to achieve a target profit = (Total fixed cost + required profit) / unit contribution

Question 4

Suggest two formulas for the sales revenue to achieve a target profit.

Answer 4

Sales revenue to achieve a target profit = sales volume to achieve a target profit * unit selling price

Revenue required to achieve a target profit = (fixed cost + required profit) / c/s ratio

Question 5

How is breakeven revenue calculated? Suggest two formulas.

Answer 5

Multiply the number of units at BEP by the unit selling price.

Breakeven revenue = fixed cost / C/S ratio

Question 6

The contribution/sales ratio (also called contribution margin) is the proportion of selling price which contributes to fixed overheads and profits. Suggest two formulas for it:

Answer 6

Contribution margin = contribution per unit / selling price per unit

Or

Contribution margin = total contribution / total sales revenue

Question 7

Margin of safety is the amount by which anticipated or existing activity exceeds (or falls short of ) breakeven. What is the margin of safety:
- in units or $
- as a percentage

Answer 7

In units or $:
Margin of safety = budgeted sales - breakeven sales

As a percentage:
(Budgeted sales - breakeven sales)/budgeted sales * 100%

Question 8

The easiest way to calculate breakeven revenue in multi-product situations is to apply a C/S ratio. The only difference is that the C/S ratio will be weighted. What is the formula for weighted average C/S ratio?

Answer 8

Weighted average C/S ratio = total contribution (from all products) / total revenue (from all products)

Question 9

What is the formula for breakeven revenue and revenue required to achieve a target profit when using the weighted C/S ratio?

Answer 9

Breakeven revenue = fixed cost / weighted average C/S ratio

Revenue required to achieve a target profit = (fixed cost + required profit) / weighted average C/S ratio

Question 10

In multi-product situations, breakeven revenue shows the total revenue required to breakeven, assuming the budgeted sales mix. Decision makers may wish to analyse this revenue by product. This can be estimated by multiplying the total breakeven revenue by the revenue ratio for each product. The revenue ratio is calculated as:

Answer 10

Revenue ratio for product X = budgeted revenue for product X / total budgeted revenue

Question 11

At breakeven point, the revenue from product X using the revenue ratio is?

Answer 11

Revenue from product X = total breakeven revenue * revenue ratio for product X.

Question 12

What are the main limitations of CVP analysis for planning and decision making?

Answer 12

1. Fixed costs remain constant regardless of the production decision. In practice, fixed costs may not be truly fixed and may vary as output changes. For example, fixed costs might be stepped in behaviour as production volume increases.
2. Variable cost per unit is constant (which may not be the case due to discounts and other economies of scale).
3. Selling price remains constant. This may not be true in practice, where an increase in volume of sales can only be achieved by lowering the price.