Cost-Volume-Profit analysis

Question 1

What is the purpose of CVP?

Answer 1

It enables managers to examine the relationships between cost, volume and profit at various levels of activity (output).

Question 2

How is contribution calculated?

Answer 2

Sales revenue - Variable costs

Question 3

Break-even equation (units).

Answer 3

Break-even point in units = Fixed costs/ Contribution per unit.

Question 4

Contribution-margin ratio. (profit-volume ratio)

Answer 4

Contribution-margin ratio= Contribution/ Sales revenue

Question 5

Margin of safety.

Answer 5

Margi of safety= Expected sales - break-even point

Question 6

Percentage margin of safety.

Answer 6

%= MOS/ Expected sales x 100

Question 7

What is operating leverage?

Answer 7

Is used as a measure of the sensitivity of profits to changes in sales.

Question 8

The greater the degree of operating leverage, …

Answer 8

the more that changes in sales activity will affect profits.

Question 9

Degree of operating leverage formula?

Answer 9

Degree of operating leverage = Contribution margin/ Profit

Question 10

CVP assumptions and limitations?

Answer 10

1) All other variables remain constant.
2) A single product or constant sales mix.
3) Total costs and total revenue are linear functions of output.
4) Profits are calculated on a variable costing basis.
5) Costs can be accurately divided into their fixed and variable elements.
6) Analysis applies only to the relevant range.
7) Analysis applies only to a short-term horizon.