Chapter 5 - Cost Volume Profit Analysis

Question 1

What is breakeven analysis?

Answer 1

Also known as CVP analysis is the study of the effects on future profit of changes in:
- fixed costs
- variable costs
- sales price
- quantity
- mix

Question 2

What is CVP an example of?

Answer 2

‘what if’ analysis

Question 3

What is what if analysis?

Answer 3

A business sets a budget based upon various assumptions about revenues, costs and overall volumes.

Question 4

What does CVP consider?

Answer 4

The impact on the budgeted profit of changes in the various factors.

Question 5

What is the breakeven point?

Answer 5

The level of activity at which there is neither profit nor loss

Question 6

What is the calculation for the breakeven point in units?

Answer 6

Fixed costs / contribution per unit

Question 7

What is the calculation for the level of activity to earn the required profit (units)?

Answer 7

Required profit + fixed costs / contribution per unit

Question 8

what is the calculation for margin of safety (units)?

Answer 8

Budgeted level of activity - breakeven level of activity

Question 9

What is the calculation for margin of safety expressed as a %?

Answer 9

budgeted sales - breakeven sales / budgeted sales x 100

Question 10

What is the calculation for the contribution to sales ratio?

Answer 10

Contribution / sales

Question 11

What is the calculation for the breakeven point in sales revenue (£)?

Answer 11

Fixed costs / CS ratio

Question 12

What is the calculation for sales revenue required to earn a target profit (£)?

Answer 12

Required profit + Fixed costs / CS ratio

Question 13

What is a breakeven chart?

Answer 13

Records costs and revenues on the vertical axis (y) and the level of activity on the horizontal axis (x)

Question 14

What is the breakeven point on a breakeven chart?

Answer 14

where the total sales revenue line cuts the total cost line

Question 15

Where do you find the variable cost in a breakeven chart?

Answer 15

the space in between the total cost and fixed cost

Question 16

Where is the margin of safety in a breakeven chart?

Answer 16

from the horizontal line of the breakeven point to the end of the vertical fixed cost

Question 17

What does a contribution breakeven chart show?

Answer 17

the variable costs line instead of the fixed cost line.

Question 18

Where do you find the fixed costs on a contribution breakeven chart?

Answer 18

The space between the total costs and variable costs

Question 19

What is a profit volume chart?

Answer 19

Plots a single line depicting the profit or loss at each level of activity.

Question 20

Where is the breakeven point on a profit-volume chart?

Answer 20

where the single line cuts the horizontal axis

Question 21

What does the vertical line on a profit-volume chart show?

Answer 21

shows profits and losses

Question 22

What does CVP analysis assume?

Answer 22

that if a range of products is sold, sales will be in accordance with a pre-determined sales mix

Question 23

What is the weighted average c/s ratio calculation?

Answer 23

total contribution for all products / total revenue for all products

Question 24

Why is the weighted average c/s ratio useful?

Answer 24

tells us what % each £ of sales revenue contributed towards fixed costs

Question 25

What is the breakeven revenue (£)?

Answer 25

Fixed costs / weighted average c/s ratio

Question 26

What is the calculation for sales revenue required to earn a target profit (£)?

Answer 26

total fixed costs + required profit / Weighted average c/s ratio

Question 27

What are some limitations of breakeven analysis?

Answer 27

• selling prices are to be unchanged
• ## Efficiency and productivity to be unchanged