Chapter 7

Question 1

What is cost behaviour

Answer 1

Cost behaviour refers to how costs respond to a change in the level of activity ( such as production outputs) within the relevant range. A cost may rise, fall, or remain constant as activity levels fluctuate

Question 2

What are variable costs?

Answer 2

Total Variable costs are those costs which vary to the volume of activity, like sales, that is, doubling the level of activity will double the total variable cost.
In a manufacturing business, for example, this would include raw materials used.
Variable costs vary in total as activity changes. On a per unit basis the cost stays the same as activity changes. If there is no activity there are no variable costs.

Question 3

What are fixed costs?

Answer 3

Total Fixed Cost - is one which is not affected by changes in the level of activity, for a specified period of time.
Fixed costs are the same irrespective the volume of activity (for
example, rent; insurance; and staff salaries.)

Question 4

How do total variable costs change in relation to activity?

Answer 4

Total variable cost changes as activity level changes.

Question 5

How do total fixed costs change in relation to activity?

Answer 5

Total fixed cost remains the same even when the activity level changes.

Question 6

How do variable costs per unit change in relation to activity?

Answer 6

Variable cost per unit remains the same over wide ranges of activity.

Question 7

How do fixed costs per unit change in relation to activity?

Answer 7

Fixed cost per unit goes down as activity level goes up.

Question 8

When units produced increase, variable cost per unit.
A) increase in proportion to the units produced
B) increase at a greater rate
than units produced
C) increase at a lesser rate than units produced
D) stay the same

Answer 8

D) stay the same

Question 9

Which ONE of the following would be a fixed cost of a manufacturer of
filing cabinets?
a) Electricity consumed by production equipment
b) The rent of the factory
c) The cost of plastic packaging to wrap the finished product
d) The cost of metal needed to manufacture the filing cabinets

Answer 9

b) The rent of the factory

Question 10

Fixed costs are usually characterised by:
a) Total costs that increase as level of activity decreases.
b) Total costs that increase as level of activity increases.
c) Unit costs that decrease as level of activity increases.
d) Unit costs remain constant.

Answer 10

c) Unit costs that decrease as level of activity increases.

Question 11

What is the cost- volume profit (CVP) analysis which is used for short- term decisions?

Answer 11

the cost-volume-profit (CVP) model, reflects the effects of changes in an organization’s activities, such as sales volume, and of its prices and costs on profit.
The simplest CVP model assumes that the only activity that drives profits is sales volume.

Question 12

How to calculate total revenue

Answer 12

Question 13

How to calculate total cost?

Answer 13

Question 14

What is the contribution margin

Answer 14

This is the difference between selling price and variable cost.

Contribution margin = selling price per unit - Variable cost per unit

Question 15

What is the contribution margin ratio

Answer 15

The CM ratio is the proportion of the selling price that contributes to fixed overheads and profits. The contribution margin ratio is:

Question 16

What is the break- even point?

Answer 16

• the level of activity at which a business makes neither a profit nor
OR
• the point where total sales revenue equals total costs (variable and fixed)

Question 17

How to find the break even point?

Answer 17

Revenue = Variable Costs + Fixed Costs

Question 18

How to find the break even in volume/ units sold

Answer 18

Question 19

How to find the break even in sales £

Answer 19

Question 20

How can a company set it self a target volume in units to achieve certain level of profits?

Answer 20

Question 21

How can a company set it self a target volume in sales to achieve certain level of profits?

Answer 21

Question 22

What is the margin of safety

Answer 22

Margin of safety is the excess of budgeted or actual sales over break-even sales. It is the amount by which sales can drop before losses begin to be incurred.

Question 23

How is the margin of safety calculated

Answer 23

Margin of safety = Budgeted sales - Break-even sales

Question 24

What are the 5 assumptions of the CVP (Breakeven) Analysis?

Answer 24

• Although the Breakeven model is a very strong tool, the output is
dependent upon the assumptions made by cost analysts. These assumptions include:
1. Selling price is constant throughout the entire relevant range
2. The only factor that affects total costs is change in volume, which increases variable and mixed costs.
3. Costs are linear throughout the entire relevant range
4. In manufacturing companies, stocks do not change (units produced = units sold)
5. In multi-product companies, the sales mix is constant

Question 25

How to calculate target profit

Answer 25

Target profit

(Fixed Costs + Required profit) / Contribution per unit

Question 26

The breakeven point can be defined as

a) the level of activity where cash flow is zero.
b) the level of activity where profits equal fixed costs.
c) the level of activity at which there is neither a profit nor a loss.
d) the level of activity where variable costs are covered by sales revenue.

Answer 26

C

Question 27

2. Which one of the following is the correct description of the break-even point? The break-even point is

a) where total revenue equals total variable costs.
b) where total revenue equals total fixed and variable costs.
c) where total revenue equals total fixed costs.
d) where total revenue equals total contribution.

Answer 27

B

Question 28

3. Which one of the following is the formula for calculating contribution per unit?

a) Variable costs per unit plus fixed costs per unit
b) Profit per unit plus variable costs per unit
c) Sales revenue per unit less fixed costs per unit
d) Sales revenue per unit less variable costs per unit

Answer 28

D

Question 29

4. Which one of the following best describes the margin of safety?

a) The formula [Fixed costs / (Sales revenue per unit - Variable costs per unit)]
b) The extent to which the total sales exceeds the total variable costs
c) The extent to which the total sales exceeds the total fixed and variable costs
d) The extent to which the planned volume of sales lies above the break-even point

Answer 29

D

Answer
The margin of safety reflects the level of risk attached to the planned output. A small margin of safety gives a business very little room to manoeuvre if costs increase more than anticipated, or sales volumes are less than forecast.

Question 30

5. On a cost-volume-profit graph, the break-even point is located

a) at the origin.
b) where the total revenue line intersects the volume axis.
c) where the total costs line intersects the pounds axis.
d) where the total revenue line intersects the total costs line.

Answer 30

d) where the total revenue line intersects the total costs line.

Question 31

Answer 31

C

Question 32

Answer 32

D

Question 33

Answer 33

Question 34

Answer 34

Question 35

Answer 35

Question 36

Answer 36

Question 37

Answer 37

Question 38

Answer 38

B

Question 39

Answer 39

A

Question 40

Answer 40

C

Question 41

Answer 41

A

Question 42

Answer 42

Question 43

Answer 43

Question 44

Answer 44

Question 45

Answer 45

£0.10

Question 46

The break-even point lies at the intersection of the total revenue line and the fixed cost line on a
CVP graph

A) True
B) False

Answer 46

B

The correct statement: The break-even point lies at the intersection of the total revenue line and total cost line (fixed and variable costs) on a CVP graph.

Question 47

How to calculate contribution margin PER UNIT

Answer 47

Contribution margin per unit = Selling price - variable cost

Question 48

What’s another way you can find out the break even point in £ using the break even in units

Answer 48

Break even point in units X selling price = break even point in £