Cost Volume Profit Analysis Flashcards
What is the breakeven point?
The volume of units needed to be sold in order to equally cover the costs incurred.
What is the formula for a single product breakeven point?
Breakeven Point = Fixed Costs / Contribution per unit
What is the formula for a multi-product breakeven point?
Breakeven Point = Fixed Costs / Weighted Average Contribution per Unit
What is the margin of safety?
Expressed as a %, the Margin of Safety measures the amount that sales must fall by before a loss is made.
What is the formula for the margin of safety?
Margin of Safety (%) = (Budgeted Sales - Breakeven Sales) / Budgeted Sales
What is the Contribution/Sales (C/S) Ratio?
An alternative method for finding the breakeven point giving the amount of contribution earned per dollar of sales.
By what other name is the C/S ratio known?
The Profit Volume Ratio
What is the formula for the C/S Ratio?
C/S Ratio = Contribution per unit / Selling Price per unit
What is the breakeven revenue?
The point at which revenue is equal to costs.
What are the 2 formulas for the single product breakeven revenue?
Breakeven Revenue = Fixed Costs / C/S Ratio
Breakeven Revenue = Breakeven Point x Selling Price per unit.
What is the formula for the multi product breakeven revenue?
Breakeven Revenue = Fixed Costs / Weighted Average C/S Ratio
How is contribution calculated?
Selling Price - Variable Costs
How is output required for target profit calculated? (Also known as minimum return).
Fixed Costs + Target Profit / Contribution per unit
What is a breakeven chart?
A graphical representation of the breakeven point.
What is the profit volume chart?
This is a variation of the breakeven chart emphasising the impact of volume changes on profit.
What are the limitations of breakeven analysis?
- Assumes all costs can be split into fixed and variable
- Fixed costs are constant
- Variable cost per unit is constant
- Selling price is constant
- Inventory levels are constant (Sales = Production)
What are the benefits of breakeven analysis?
Provides quick and simple estimates.
It is a form of sensitivity analysis so is useful for assessing risk around sales volume.
How is a multi PV chart plotted.
In order of ranking of highest C/S Ratio to lowest for each ‘product’.
What is the main assumption of multi product breakeven analysis?
Products must be sold in their fixed proportions.
