Chapter 7

Question 1

What is CVP?

Answer 1

COS- VOLUME PROFIT understand the interrelationship among cost, volume and profit in an organization

Question 2

First Element of CVP?

Answer 2

prices of products

Question 3

Second Element of CVP?

Answer 3

volume or level of activity

Question 4

Third Element of CVP?

Answer 4

per unit variable costs

Question 5

Fourth Element of CVP?

Answer 5

total fixed costs

Question 6

Fifth Element of CVP?

Answer 6

mix of products sold

Question 7

What is the contribution income statement?

Answer 7

It is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behaviour.

Question 8

What is CM?

Answer 8

Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. IT CAN BE PRESENTED IN A PER UNIT BASIS.

Question 9

What is the Contribution approach?

Answer 9

We do not need to prepare an income statement to estimate profits at a particular sales volume. Simply multiply the number of units sold above break-even by the contribution margin per unit

Question 10

What does CVP graph have?

Answer 10

In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis.
Total Expenses

Question 11

3 Lines that are on the CVP graph?

Answer 11

Total Sales, Total Expenses and Fixed Expenses

Question 12

Break-Even Point graphically?

Answer 12

Point when Total Sales and Total Expense intersects

Question 13

What is the CM ratio?

Answer 13

Total CM/ Total Sales

Question 14

What is CM ratio in terms of ratio?

Answer 14

Unit CM/ Unit Selling Price

Question 15

2 Ways that Break-Even Analysis can be approached?

Answer 15

Equation Method and Contribution Margin Method

Question 16

Break Even formula?

Answer 16

Sales = Variable expenses + Fixed expenses + Profits(Q)

Question 17

Break-even point in units sold (CM)

Answer 17

Fixed Expenses/ CM per unit

Question 18

Break-even point in total sales dollars (CM)

Answer 18

Fixed expenses/ CM ratio

Question 19

Unit Sales to attain the target profit?

Answer 19

(Fixed Expenses + Target profit)/ CM per unit

Question 20

What is the The Margin of Safety?

Answer 20

The margin of safety is the excess of budgeted (or actual) sales over the break‐even volume of sales

Question 21

The Margin of Safety formula

Answer 21

Total sales – Break-even sales

Question 22

What is a cost structure?

Answer 22

Cost structure refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization’s cost structure

Question 23

Advantage of high fixed cost structure?

Answer 23

Is that income will be higher in good years compared to companies with lower proportion of fixed costs.

Question 24

Disadvantage of High fixed cost structure?

Answer 24

is that income will be lower in bad years compared to companies with lower proportion of fixed costs.

Question 25

Cost Structure tip?

Answer 25

Companies with low fixed cost structures enjoy greater stability in income across good and bad years.

Question 26

What is an Operating Leverage?

Answer 26

A measure of how sensitive net operating income is to percentage changes in sales

Question 27

Degree of Operating Leverage?

Answer 27

Contribution Margin/ Net operating income

Question 28

What is Sales Mix?

Answer 28

Sales mix is the relative proportion in which a company’s products are sold., Different products have different selling prices, cost structures, and contribution margins.

Question 29

1st Key Assumptions of CVP Analysis?

Answer 29

Selling price is constant

Question 30

2nd Key Assumptions of CVP Analysis?

Answer 30

Costs are linear and can be accurately divided into variable (constant per unit) and fixed (constant in total) elements

Question 31

3rd Key Assumptions of CVP Analysis?

Answer 31

In multiproduct companies, the sales mix is constant.

Question 32

4th Key Assumptions of CVP Analysis?

Answer 32

In manufacturing companies, inventories do not change (units produced = units sold).