Ch9 Cost-Volume-Proft (CVP) Analysis

Question 1

Required data for CVP analysis

Answer 1

1. unit price
2. variable cost per unit
3. total fixed costs
4. units produced or sold
5. operating income (targeted profit)

Question 2

CVP limitations (assumptions)

Answer 2

1. selling price is constant
2. costs are linear and can be accurately divided into variable and fixed elements - fixed costs are constant within certain range, but not truely linear
3. product mix is constant
4. no time-value of money considered

Sensitivity analysis can help to mitigate the limit.

Question 3

CM format presentation

Answer 3

Variable costs - manufacturing + non-manufacturing variable costs:

Direct materials
Direct labour
Variable overhead

Variable selling and admin

• only used for internal management decision-making, not acceptable for external reporting

Question 4

Break-even point

Answer 4

1. break-even (units) = fixed cost / CM per unit (round up to next full unit)
2. break-even ($) = fixed cost / CM ratio (round up to next multiple of price)

Question 5

Weighted average contribution margin (WACM)

Answer 5

1. WACM per unit = total CM / total units
2. WACM % = total CM / total sales

Question 6

Break-even points for product mix

Answer 6

1. break-even (units) = fixed cost / WACM per unit
2. break-even ($) = fixed cost / WACM ratio