Cost Volume Profit Analysis

Question 1

What is the breakeven point?

Answer 1

The volume of units needed to be sold in order to equally cover the costs incurred.

Question 2

What is the formula for a single product breakeven point?

Answer 2

Breakeven Point = Fixed Costs / Contribution per unit

Question 3

What is the formula for a multi-product breakeven point?

Answer 3

Breakeven Point = Fixed Costs / Weighted Average Contribution per Unit

Question 4

What is the margin of safety?

Answer 4

Expressed as a %, the Margin of Safety measures the amount that sales must fall by before a loss is made.

Question 5

What is the formula for the margin of safety?

Answer 5

Margin of Safety (%) = (Budgeted Sales - Breakeven Sales) / Budgeted Sales

Question 6

What is the Contribution/Sales (C/S) Ratio?

Answer 6

An alternative method for finding the breakeven point giving the amount of contribution earned per dollar of sales.

Question 7

By what other name is the C/S ratio known?

Answer 7

The Profit Volume Ratio

Question 8

What is the formula for the C/S Ratio?

Answer 8

C/S Ratio = Contribution per unit / Selling Price per unit

Question 9

What is the breakeven revenue?

Answer 9

The point at which revenue is equal to costs.

Question 10

What are the 2 formulas for the single product breakeven revenue?

Answer 10

Breakeven Revenue = Fixed Costs / C/S Ratio

Breakeven Revenue = Breakeven Point x Selling Price per unit.

Question 11

What is the formula for the multi product breakeven revenue?

Answer 11

Breakeven Revenue = Fixed Costs / Weighted Average C/S Ratio

Question 12

How is contribution calculated?

Answer 12

Selling Price - Variable Costs

Question 13

How is output required for target profit calculated? (Also known as minimum return).

Answer 13

Fixed Costs + Target Profit / Contribution per unit

Question 14

What is a breakeven chart?

Answer 14

A graphical representation of the breakeven point.

Question 15

What is the profit volume chart?

Answer 15

This is a variation of the breakeven chart emphasising the impact of volume changes on profit.

Question 16

What are the limitations of breakeven analysis?

Answer 16

• 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)

Question 17

What are the benefits of breakeven analysis?

Answer 17

Provides quick and simple estimates.

It is a form of sensitivity analysis so is useful for assessing risk around sales volume.

Question 18

How is a multi PV chart plotted.

Answer 18

In order of ranking of highest C/S Ratio to lowest for each ‘product’.

Question 19

What is the main assumption of multi product breakeven analysis?

Answer 19

Products must be sold in their fixed proportions.