Cost Volume Profit Analysis (Breakeven)

Question 1

What are the different calculations that can be used in single product Breakeven analysis?

Answer 1

1. Breakeven point in units = Total fixed costs/unit contribution.
2. Level of activity to earn required profit = Required profit + fixed costs / Contribution per unit.
3. Margin of Safety = Budgeted level of activity - breakeven level of activity
4. Margin of safety % = Budgeted sales - breakeven sales / Budgeted sales x 100
5. Contribution to Sales ratio = Contribution/sales
6. Breakeven point in sales revenue = Fixed costs/CS ratio
7. Sales revenue required to earn a target profit = Required profit + Fixed costs / CS ratio

Question 2

What are the different calculations for multi product CVP analysis?

Answer 2

1. Weighted Average C/S ratio - Total contribution for all products/total revenue for all products
2. Breakeven revenue = Fixed costs/weighted average C/S ratio.

Question 3

How is a target profit for multiple products calculated?

Answer 3

Sales revenue required to earn a target profit = Fixed costs + Required profit / Weighted average C/S ratio.

Question 4

What are the steps to calculate a multi product margin of safety?

Answer 4

1. Calculate contribution per unit
2. Calculate contribution per mix
3. Calculate the breakeven point in terms of the number of mixes.
4. Calculate the breakeven point in terms of the units of products
5. Calculate break even point in terms of revenue.
6. Calculate the margin of safety.

Question 5

What are the underlaying assumptions in Cost/volume profit analysis and how do these limit its precision and reliability?

Answer 5

• Total costs and revenues are linear over the relevant range - in reality volumes and product mix will fluctuate over a time period.
• All costs can be divided in to Fixed and variable - this essentially ignores semi variable costs by including them in variable costs.
• Total fixed costs remain constant - where costs a step fixed CVP does not take this in to account.
• Selling price is unchanged - competition in the market place along with changes to materials costs may drive a required change in prices.
• Efficiency and production are unchanged - increases in production requirements may result in overtime (increased cost) but also improved efficiency due to familiarity.
• That production volume = sales volume, this may not always be the case.

Question 6

How should analysis of a break even graph be approached?

Answer 6

• Identify which lines relate to fixed and variable costs. the Total cost line will usually start above zero at the fixed cost amount.
• Once cost line is identified the remaining line will be revenue( and will start from 0) , BE point is where revenue crosses variable costs.
• Changes in the gradients of the Fixed cost line indicates a variation in the cost, there may be no info on the reason for this (say so)
• Changes in the gradient of the Total cost line indicate a shift in the Total cost per unit, this may relate to economies of scale or other reasons, point this out. Compare to changes in FC line.
• Changes in the gradient of revenue line indicate a change in the sales price per unit, calculate different sales prices, speculate on reasons if not given.
• Profit = difference between Fixed cost and Revenue lines.
• Margin of safety = units between BE point and end of revenue line.

Question 7

What are the assumptions when carrying out a multi product CVP analysis?

Answer 7

1. Sales will be based on a pre determined sale mix.
2. The sales mix will remain constant.
3. Average costs and revenues are used.