Accounting 2 - Cost-Volume-Profit (CVP) Analysis

Question 1

What is CVP analysis and what does it show us?

Answer 1

CVP analysis = accounting technique used to understand how operating profit is affected by changes in:

• variable costs
• fixed costs
• selling price per unit
• sales mix or 2+ different products

Question 2

Contribution (or contribution margin) calculation?

Answer 2

Sales - variable costs = contribution

S-VC

Note, fixed costs are not included in contribution as they are assumed to remain the same regardless of volume, they instead come after the contribution line in the accounts

Question 3

Contribution margin ratio (CMR) formula?

Answer 3

(Sales revenue - variable costs) / sales revenue

(S-VC)/S

Question 4

Breakeven point calculation in units?

Answer 4

Total fixed costs / contribution per unit (S-VC from earlier) = required sales (units)

FC / Cont

Question 5

Breakeven point calculation in £s?

Answer 5

Total fixed costs / contribution margin ratio

FC / CMR

Question 6

Margin of safety (£s) formula?

Answer 6

Total budgeted (or actual) sales - breakeven sales

Question 7

Margin of safety (%) formula?

Answer 7

Margin of safety (£s) / total budgeted (or actual) sales

Question 8

Target profit (in units sold) formula?

Answer 8

(Fixed costs + desired profit) / contribution per unit