cost volume profit analysis

Question 1

what is cost volume profit analysis?

Answer 1

it is a technique used to determine the effects of changes in an organisation’s sales volume on:
Costs
Revenue
Profit (Revenue – Costs)

Question 2

CVP aim?

Answer 2

to assist managers in making decisions to improve PROFITABILITY and increase shareholder value

Question 3

Unit contribution margin formula

Answer 3

= Unit sales price – Unit variable costs(DM+DL+MOH)

Question 4

total contribution margin

Answer 4

= Total sales revenues – Total variable costs

Or = UCM ×No. of units sold

Question 5

contribution margin ratio

Answer 5

= Unit contribution margin / unit sales price

Question 6

Contribution margin percentage

Answer 6

= Contribution margin ratio ×100

Question 7

break even point is?

Answer 7

point at which volume of sales will result in:
total revenues - total costs = 0

to break even, need to sell enough units to cover both variable and fixed costs

Question 8

break even point in units?

Answer 8

fixed costs / UCM

Question 9

break even point in dollar

Answer 9

fixed costs / CM Ratio

Question 10

safety margin?

Answer 10

Difference between the budgeted sales revenue and breakeven sales revenue

indicates extent to which sales can decline before profits become zero

Question 11

target net profit?

Answer 11

A desired profit level determined by management.

The break-even formula can be used to determine the sales volume required to achieve a target profit

Question 12

target sales volume (units)

Answer 12

(fixed cost + target profit) / UCM

Question 13

target sales volume (dollars)

Answer 13

(Fixed cost + target profit) / CM ratio

Question 14

Sales volume (in units) required to earn target net after tax profit

Answer 14

(FC + Target profit before tax) / Unit contribution margin

Question 15

Sales volume (in dollars) required to earn target net after tax profit

Answer 15

(FC + Target profit before tax) / Contribution margin ratio

Question 16

target profit before tax?

Answer 16

net profit after tax / (1 - tax rate)

Question 17

sales mix definition?

Answer 17

The relative proportions of each type of product sold by the organisation

Question 18

Weighted average unit contribution margin definition

Answer 18

The average of the products’ unit contribution margins, weighted by the sales
mix.

Question 19

Breakeven point with multiple products (in units) =

Answer 19

(fixed cost) / weighted average UCM

Question 20

Limitations of CVP analysis

Answer 20

• merely simplified model
• usefulness greater in less complex smaller firms or stand alone projects
• for large companies, useful as decision tool for planning stages of new projects/venture
• based on several assumption that limit usefulness for decision making

Question 21

What are the basic assumptions of cost-volume-profit (CVP) analysis?

Answer 21

i) The behaviour of total revenue is linear.
ii) The behaviour of total costs is linear over the relevant range.
iii) For both variable and fixed costs, the sales volume is the only cost driver.
iv) In multiproduct organisations, the sales mix remains constant over the relevant range.
v) In manufacturing firms, the levels of all inventory at the beginning and end of the
period are the same.

Question 22

What is the meaning of the term unit contribution margin? Contribution to what?

Answer 22

1. Unit contribution margin is the difference between the sales price per unit and variable costs per
   unit. It is an alternative way to calculate the break-even point. It measures the relationship between
   sales price and variable costs per unit, by removing fixed costs.